-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IMZqTS07uN6OJBmUqzpYy2BOw12dQSw/zP8gixBak4unnWcVo5/yRi32ddlqQNT4 QuMr0BkAwrOB0frndzjbCA== 0000950124-96-001126.txt : 19960315 0000950124-96-001126.hdr.sgml : 19960315 ACCESSION NUMBER: 0000950124-96-001126 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960416 FILED AS OF DATE: 19960314 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS BANKING CORP CENTRAL INDEX KEY: 0000351077 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382378932 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-10535 FILM NUMBER: 96534781 BUSINESS ADDRESS: STREET 1: ONE CITIZENS BANKING CTR CITY: FLINT STATE: MI ZIP: 48502 BUSINESS PHONE: 8102572500 MAIL ADDRESS: STREET 1: 1 CITIZENS BANKING CENTER CITY: FLINT STATE: MI ZIP: 48502 DEF 14A 1 DEFINITIVE SCHEDULE 14A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential For Use of the [X] Definitive Proxy Statement Commission Only (as permitted [ ] Definitive Additional Materials by Rule 14a-6(e)(2) [ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 CITIZENS BANKING CORPORATION - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than Registrant) Payment of Filing Fee (Check the appropriate box): [X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 2(a)(2) of Schedule 14A. [ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: --------------------------------------------------------------------- 2) Aggregate number of securities to which transaction applies: --------------------------------------------------------------------- 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): --------------------------------------------------------------------- 4) Proposed maximum aggregate value of transaction: --------------------------------------------------------------------- 5) Total fee paid: --------------------------------------------------------------------- [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. 1) Amount Previously Paid: --------------------------------------------------------------------- 2) Form, Schedule or Registration Statement No. --------------------------------------------------------------------- 3) Filing Party: --------------------------------------------------------------------- 4) Date Filed: --------------------------------------------------------------------- 2 [CITIZENS BANKING CORPORATION LETTERHEAD] March 14, 1996 To The Shareholders: The annual meeting of shareholders of Citizens Banking Corporation will be held in the Carriage Hall Room of the Radisson Riverfront Hotel Flint, One Riverfront Center West, Flint, Michigan 48502, on Tuesday, April 16, 1996, at 10:00 a.m., local time, in accordance with the provisions of our bylaws. You are cordially invited to attend this meeting. It is important that your shares be represented, regardless of the number you own. Therefore, we request that you please date, sign and return your proxy promptly in the enclosed envelope whether or not you plan to attend the meeting. Voting by proxy will not affect your ability to attend the meeting or to change your vote. Sincerely yours, Charles R. Weeks Charles R. Weeks Chairman and Chief Executive Officer 3 [CITIZENS BANKING CORPORATION LETTERHEAD] THOMAS W. GALLAGHER Senior Vice President, General Counsel and Secretary NOTICE OF ANNUAL MEETING OF SHAREHOLDERS, APRIL 16, 1996 To the Shareholders of Citizens Banking Corporation: Notice is hereby given that the annual meeting of shareholders of Citizens Banking Corporation (the "Corporation") will be held in the Carriage Hall Room of the Radisson Riverfront Hotel Flint, One Riverfront Center West, Flint, Michigan 48502, on Tuesday, April 16, 1996, at 10:00 a.m., local time, for the following purposes: (1) To elect six (6) Class I directors to serve a three (3) year term and until their successors are duly elected and qualify. (2) To transact such other business as may properly come before the meeting or any adjournment or adjournments thereof. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE DIRECTORS NOMINATED. Shareholders of record of the Corporation's common stock outstanding at the close of business on February 29, 1996 are entitled to notice of and to vote at the meeting. You are invited to attend this meeting. Please date, sign and return your proxy promptly in the enclosed, stamped envelope whether or not you plan to be present at the meeting. You may still vote in person if you attend the meeting. By Order of the Board of Directors Thomas W. Gallagher Thomas W. Gallagher Secretary Flint, Michigan March 14, 1996 4 [CITIZENS BANKING CORPORATION LETTERHEAD] Citizens Banking Corporation One Citizens Banking Center 328 S. Saginaw St. Flint, Michigan 48502 - -------------------------------------------------------------------------------- PROXY STATEMENT - -------------------------------------------------------------------------------- This proxy statement is furnished in connection with the solicitation of proxies by the board of directors of Citizens Banking Corporation (the "Corporation") to be used at the annual meeting of shareholders of the Corporation and any adjournments thereof. The annual meeting will be held on April 16, 1996 at the time and place and for the purposes set forth in the accompanying notice of annual meeting of shareholders. This proxy statement, the proxy and notice of annual meeting of shareholders are first being provided to shareholders on or about March 14, 1996. The shareholders of the common stock of the Corporation ("Common Stock") as of the close of business on February 29, 1996 will be entitled to be present and to vote at the meeting. Each share is entitled to one (1) vote on each matter to be voted upon at the meeting. On February 29, 1996, there were 14,356,835 shares of Common Stock outstanding and entitled to vote. The Corporation has no other class of stock issued and outstanding at this time that is entitled to vote at the meeting. The board of directors requests that you execute and return the proxy promptly, whether or not you plan to attend the meeting. The shares represented by properly executed proxies will be voted in accordance with the instructions provided therein and where no instructions are given, will be voted in favor of the election of the Class I directors identified herein. Any proxy may be revoked by the person giving it at any time prior to its being exercised by giving written notice of such revocation to the secretary of the Corporation, by executing a later dated proxy or by voting in person at the annual meeting. The costs of soliciting proxies will be borne by the Corporation. The solicitation of proxies will be made primarily by mail. The Corporation has, however, retained the firm of Kissel-Blake Inc., specialists in proxy solicitation, to solicit proxies on its behalf from brokers, bank nominees, and other institutional holders of its stock at an anticipated cost of $6,500 plus certain out-of-pocket expenses. Proxies may also be solicited by directors, officers, and other employees of the Corporation and its subsidiaries personally, and by telephone, facsimile, or other means. No additional compensation will be paid to directors, officers, or employees for any such solicitation nor will any such solicitation result in more than a minimal cost to the Corporation. Arrangements may also be made directly by the Corporation with banks, brokerage houses, custodians, nominees, and fiduciaries to forward solicitation material to the beneficial owners of stock held of record by them and to obtain authorization for the execution of proxies. The Corporation may reimburse such institutional holders for reasonable expenses incurred by them in connection therewith. The persons named in the proxy to represent shareholders who are present by proxy at the meeting are Patricia L. Learman and George H. Kossaras. 1 5 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The table below includes all of the shareholders of the Corporation known by the Corporation to beneficially own more than five percent of its Common Stock as of December 31, 1995.
COMMON STOCK INVESTMENT POWER VOTING POWER BENEFICIALLY OWNED ----------------------------- ----------------------------- AS A PERCENTAGE OF NAME AND ADDRESS OF COMMON STOCK SOLE SHARED NONE SOLE SHARED NONE OUTSTANDING COMMON BENEFICIAL OWNER BENEFICIALLY OWNED STOCK Citizens Commercial & Savings Bank 328 S. Saginaw St. Flint, Michigan 48502(1) 1,969,745 715,078 1,253,717 950 844,065 1,072,328 53,352 13.742% CenTra, Inc. 12225 Stephens Warren, Michigan 48089(2) 1,736,061 1,722,381 13,680 -0- 1,722,381 13,680 -0- 12.112%
- ------------------- (1)As sole or co-fiduciary, Citizens Commercial & Savings Bank will generally vote the shares held by it in trusts or estates in which the indenture creating the same grants such power. Shares held in all other trusts or estates in which the bank acts as co-fiduciary will generally be voted by the other co-fiduciary or by the bank at the direction of such co-fiduciary. (2)The information furnished for CenTra, Inc. is based upon data which have been supplied to the Corporation by CenTra, Inc. As set forth in the table, CenTra, Inc. shares investment and voting power with respect to 13,680 shares. The persons with whom such powers are shared and the amounts attributable to each such person are as follows: Matthew T. Moroun, 102; Nora M. Moroun, 100 and the Manuel J. Moroun Trust under agreement dated March 4, 1977, for the benefit of Manuel J. Moroun, 13,478. 2 6 SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth the number of shares of the Corporation's Common Stock beneficially owned as of December 31, 1995, together with the percentage of the outstanding shares which such ownership represents, by (i) each director and nominee for election to the board of directors, (ii) each executive officer named in the Summary Compensation Table set forth on page 14 of this proxy statement and (iii) all directors and executive officers of the Corporation as a group. The information with respect to directors and executive officers has been obtained from the respective individuals and is reported in accordance with the beneficial ownership rules of the Securities and Exchange Commission (the "Commission") under which a person may be deemed to be the beneficial owner of a security if such person has or shares voting power or investment power with respect to such security or has the right to acquire such ownership within the next 60 days. Accordingly, the amounts shown in the following table do not purport to represent beneficial ownership for any purpose other than compliance with the Commission's reporting requirements.
Common Stock BENEFICIALLY OWNED COMMON STOCK AS A PERCENTAGE OF BENEFICIALLY OWNED OUTSTANDING COMMON AS OF DECEMBER 31, SOLE VOTING AND SHARED VOTING AND STOCK AS OF NAME 1995 DISPOSITIVE POWER DISPOSITIVE POWER DECEMBER 31, 1995 Edward P. Abbott 11,802 11,712 90 .082% Hugo E. Braun Jr. 14,136 14,136 -0- .099% Jonathan E. Burroughs II(1) 202,094 158,437 43,657 1.410% Gary O. Clark(2) 116,680 94,964 21,716 .784% Joseph P. Day 1,510 1,510 -0- .011% John W. Ennest(3) 156,173 156,173 -0- 1.081% Lawrence O. Erickson 281,565 1,000 280,565 1.964% Victor E. George 4,016 4,016 -0- .028% William J. Hank(4) 279,530 118,512 161,018 1.947% George H. Kossaras 49,441 14,684 34,757 .345% Patricia L. Learman 4,118 1,300 2,818 .029% William F. Nelson Jr. 5,652 4,852 800 .039% Paul A. Rowley 3,294 2,112 1,182 .023% William C. Shedd 5,314 1,792 3,522 .037% David A. Thomas Jr.(5) 55,548 55,548 -0- .387% James E. Truesdell Jr. 26,842 1,000 25,842 .187% Robert J. Vitito(6) 148,416 113,335 35,081 1.029% Charles R. Weeks(7) 183,905 179,600 4,305 1.276% Kendall B. Williams 1,812 1,212 600 .013% All Directors and Executive Officers as a Group (23)(8) 1,762,450 11.829%
- -------------- (1) The shares shown for Mr. Burroughs II, include: 28,794 shares held in the Burroughs' Memorial Trust, to which Mr. Burroughs II serves as one of 5 trustees. Mr. Burroughs II disclaims beneficial ownership of such shares. (2) Includes 49,461 exercisable options to purchase Common Stock. (3) Includes 118,319 exercisable options to purchase Common Stock. (4) Includes 23,842 exercisable options to purchase Common Stock. 3 7 (5)Includes 31,632 exercisable options to purchase Common Stock. (6)Includes 85,715 exercisable options to purchase Common Stock. (7)Includes 82,560 exercisable options to purchase Common Stock. (8)The directors and executive officers disclaim beneficial ownership of 206,354 of these shares. Also, of the 1,762,450 shares shown as being beneficially owned by such group, 565,972 represent exercisable options to purchase Common Stock. ELECTION OF DIRECTORS In accordance with the Corporation's restated articles of incorporation, the board of directors is divided into three classes. Each year, on a rotating basis, the terms of office of the directors in one of the three classes will expire. Successors to the class of directors whose terms have expired will be elected for a three-year term. The directors whose terms expire at the 1996 annual meeting of shareholders ("Class I directors") are Edward P. Abbott, Hugo E. Braun Jr., Jonathan E. Burroughs II, Lawrence O. Erickson, William J. Hank, and Robert J. Vitito. Upon the recommendation of the directors nominating committee, the board of directors has nominated each of these individuals for re-election as Class I directors at the 1996 annual meeting of shareholders for a term expiring at the 1999 annual meeting of shareholders or upon the election and qualification of their successors. If any of the nominees should be unable to serve, the proxies may be voted for the election of such other person or persons as the board of directors may recommend or the number of directors will be automatically reduced by the number of nominees unable to serve if no substitute is recommended by the board of directors. Six nominees will be elected as Class I directors at the 1996 annual meeting of shareholders. On the basis of information presently available to the board of directors, only the six persons named above as nominees will be nominated for election as directors. Shares represented by proxies in the accompanying form will be voted for the election of such nominees unless a contrary direction is indicated. The affirmative vote of a plurality of the votes cast at the meeting is required for election. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THE NOMINEES. 4 8 The name and age of each nominee and incumbent director, positions and offices with the Corporation and its subsidiaries, his or her five-year business experience, and the year each became a director of the Corporation, according to information furnished by such nominees and incumbent directors, are set forth below. CLASS I NOMINEES TO SERVE THREE (3) YEARS
BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS, DIRECTORSHIPS IN CERTAIN POSITIONS AND OFFICES SERVED CONTINUOUSLY CORPORATIONS, AND PRINCIPAL WITH CORPORATION AND AS A DIRECTOR OF OCCUPATIONS IF OTHER THAN WITH NAME AGE ITS SUBSIDIARIES CORPORATION CORPORATION AND ITS SUBSIDIARIES Edward P. Abbott 56 Director of 1982 President and Chief Executive Corporation; Director, Officer, Abbott's Meat, Inc., a Citizens Commercial & wholesale and retail meat Savings Bank. distributor. Hugo E. Braun Jr. 63 Director of 1986 Attorney & Partner, Braun Corporation; Director, Kendrick Finkbeiner; Director Second National Bank of Wolohan Lumber Co. Saginaw. Jonathan E. 53 Director of Corporation. 1986 President, JEB Enterprises, an Burroughs II investment consulting firm. Lawrence O. Erickson 60 Director of 1993 Chief Executive Officer, Four- Corporation; Director, Way Tool & Die, Inc., an National Bank of Royal engineering consulting firm for Oak. metal stamping fabrication and tool manufacturing. William J. Hank 63 Director of 1987 Chairman and Chief Executive, Corporation; Director, Farnham Investments Group; Commercial National Retired Executive Vice Bank of Berwyn. President, Citizens Banking Corporation; Retired Chairman of the Board, Commercial National Bank of Berwyn. Robert J. Vitito 52 President, Chief 1991 Administrative Officer and Director of Corporation; Chairman of the Board, Second National Bank of Saginaw; Director, Citizens Commercial & Savings Bank; Director, Second National Bank of Bay City; Director, State Bank of Standish; Director, Grayling State Bank.
5 9 CLASS II CONTINUING DIRECTORS - TERM EXPIRING IN 1997
BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS, DIRECTORSHIPS IN CERTAIN POSITIONS AND OFFICES SERVED CONTINUOUSLY CORPORATIONS, AND PRINCIPAL WITH CORPORATION AND AS A DIRECTOR OF OCCUPATIONS IF OTHER THAN WITH NAME AGE ITS SUBSIDIARIES CORPORATION CORPORATION AND ITS SUBSIDIARIES Joseph P. Day 56 Director of 1992 President, Banner Engineering & Corporation, Director, Sales, Inc., a combustion Second National Bank engineering and manufacturing firm. of Saginaw. John W. Ennest 53 Vice Chairman of the 1991 Board, Chief Financial Officer, and Treasurer of Corporation; Director, Citizens Commercial & Savings Bank; Director Second National Bank of Saginaw; Chairman of the Board, Commercial National Bank of Berwyn. Victor E. George 64 Director of 1982 Chairman of the Board, Victor Corporation; Chairman George Oldsmobile, Inc., an of the Board, Citizens automobile dealership. Commercial & Savings Bank. George H. Kossaras 68 Director of 1982 President, Spring's Drugs Store, Corporation; Director, Inc., a retail drug store. Citizens Commercial & Savings Bank. Patricia L. Learman 68 Director of 1986 Attorney Corporation; Director, Second National Bank of Saginaw. Paul A. Rowley 68 Director of 1994 President and Part Owner, Corporation; Director, Rowley Brothers, Inc., a Second National Bank wholesale distributor of of Bay City. automotive aftermarket products.
6 10 CLASS III CONTINUING DIRECTORS - TERM EXPIRING IN 1998
BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS, DIRECTORSHIPS IN CERTAIN POSITIONS AND OFFICES SERVED CONTINUOUSLY CORPORATIONS, AND PRINCIPAL WITH CORPORATION AND AS A DIRECTOR OF OCCUPATIONS IF OTHER THAN WITH NAME AGE ITS SUBSIDIARIES CORPORATION CORPORATION AND ITS SUBSIDIARIES William F. Nelson Jr. 62 Director of 1986 President, Director, and Owner, Corporation; William F. Nelson Electric, Inc., Director, Second an electrical contractor for National Bank of commercial and industrial Saginaw. businesses. William C. Shedd 56 Director of 1982 Attorney and Partner, Corporation; Winegarden, Shedd, Haley, Director, Citizens Lindholm & Robertson. Commercial & Savings Bank. David A. Thomas Jr. 59 Vice Chairman of 1991 the Board of Corporation; President, Chief Executive Officer and Director, Citizens Commercial & Savings Bank; Director, National Bank of Royal Oak. James E. Truesdell Jr. 65 Director of 1982 President-Secretary, J. Austin Corporation; Oil Company of Flint, Inc., an Director, Citizens investment and real estate Commercial & development firm. Savings Bank. Charles R. Weeks 61 Chairman of the 1982 Director, Wolohan Lumber Co. Board and Chief Executive Officer of Corporation; Vice Chairman of the Board, Citizens Commercial & Savings Bank; Director, Second National Bank of Saginaw. Kendall B. Williams 43 Director of 1992 Attorney and Vice President, Corporation; Gault Davison, P.C. Director, Citizens Commercial & Savings Bank.
7 11 MEETINGS OF DIRECTORS During calendar year 1995, four (4) regular meetings and two (2) special meetings of the board of directors were held. During such period, all incumbent directors attended at least 75% of the aggregate of the number of meetings of the board of directors and the number of meetings held by the committees on which they serve. COMMITTEES OF THE BOARD OF DIRECTORS The Corporation has several committees on which members of the board of directors serve, including an audit committee, a compensation and benefits committee, and a directors nominating committee. The audit committee meets quarterly and on call when needed, and the compensation and benefits committee and directors nominating committee meet on call. The AUDIT COMMITTEE met 4 times during 1995 and is currently comprised of the following outside directors: George H. Kossaras, Chairman; Edward P. Abbott; Joseph P. Day; Patricia L. Learman; William F. Nelson Jr.; and James E. Truesdell Jr. The responsibilities of the committee are: to oversee the internal accounting controls for the Corporation and its subsidiaries; to oversee the internal audit function of the Corporation and its subsidiaries; to recommend to the board of directors the independent auditors to be retained to conduct the annual audit of the Corporation; to review the annual audit plan with the independent auditors and the internal auditors; to review the results of internal audit examinations and management's responses thereto; to review the financial results and the results of the independent audit, including "Management Letter" comments; to prepare summary reports to the board of directors together with any recommendations for action; to review the non-audit services performed by the independent auditors to ensure that performance of such services does not impair the independence of the auditors; to oversee special investigations; to review with management the programs and procedures to avoid conflicts of interest, as well as those covering other aspects of business ethics; to review annually the performance of the general auditor; and to handle such other matters as may be properly delegated to the committee by the board of directors. The COMPENSATION AND BENEFITS COMMITTEE met 6 times during 1995 and is currently comprised of the following directors: Hugo E. Braun Jr., Chairman; Lawrence O. Erickson; Victor E. George; James E. Truesdell Jr.; and Kendall B. Williams. The responsibilities of the committee are: to approve all aspects of corporate executive compensation such as merit increases, salary ranges, and special employment or post employment arrangements; to determine and grant awards under the Corporation's Second Amended Stock Option Plan and to amend or change the Plan within the parameters of the Plan and as permitted by law; to review and approve adjustments to the Corporation's annual Management Incentive Plan target as well as awards under such Plan; to approve amendments or changes to the pension plan and to review the actions of the pension plan administrative committee; to approve amendments or changes to the Corporation's Directors Deferred Compensation Plan; to approve amendments and changes to other employee benefit plans of the Corporation including welfare, defined benefit, defined contribution and deferred income plans; to review other corporate-wide benefit plans and to determine their appropriateness and dimensions; to approve any salary reduction plan or any other employee stock purchase, savings, pension, profit sharing, or similar benefit plan or amendments to such plans which authority and powers shall extend to the issuance of stock in connection with such plans; and to handle such other matters as may be properly delegated to the committee by the board of directors. 8 12 The DIRECTORS NOMINATING COMMITTEE met 1 time during 1995 and is currently comprised of the following directors: Charles R. Weeks, Chairman; Hugo E. Braun Jr.; Jonathan E. Burroughs II; Victor E. George; and Paul A. Rowley. The responsibilities of the committee are: to determine a desirable balance of expertise among board members; to identify qualified candidates to fill board positions; to provide aid in attracting qualified candidates to the board of directors; to recommend the slate of director nominees to the board of directors for inclusion in the Corporation's proxy statement for election by the shareholders at the annual meetings; to consider director nominees proposed by shareholders; and to handle such other matters as may be properly delegated to the committee by the board of directors. Shareholders proposing director nominees shall provide written notice of such intention to the president or secretary of the Corporation at least thirty days prior to the shareholders meeting for which such nominations are proposed and shall, in accordance with the bylaws of the Corporation, provide for each such nominee all of the information that would be required under the rules of the Commission in a proxy statement soliciting proxies for the election of such nominees as directors of the Corporation. COMPENSATION OF DIRECTORS During 1995, directors of the Corporation were paid an annual retainer of $6,000 plus the sum of $900 for attendance at each meeting of the board of directors. Non-officer directors were paid $600 for each committee meeting attended with the exception of the committee chairpersons who were paid $900. Committee member directors who are also employees of the Corporation do not receive fees for committee meeting attendance. The Corporation also maintains the Stock Option Plan for Directors. Annually during the ten year term of the Plan, each nonemployee director serving on the board of directors immediately following an annual meeting of shareholders will receive an automatic grant of a non-qualified stock option to purchase 1,000 shares of Common Stock at an exercise price equal to the fair market value per share of Common Stock on the date of the annual meeting of shareholders. Each such option will become exercisable in full six months following the grant date and expire five years after grant. On April 18, 1995, pursuant to the Plan nonemployee directors received a stock option grant to purchase 1,000 shares of Common Stock of the Corporation at an exercise price of $26.50 per share. 9 13 EXECUTIVE OFFICERS Below is a current listing of executive officers of the Corporation setting forth the name, age, five year business experience and year each became an executive officer of the Corporation. Executive officer appointments are made or reaffirmed annually at the meeting of the board of directors immediately following the annual meeting of shareholders. The board of directors may also make executive officer appointments at other times throughout the year.
YEAR BECAME EXECUTIVE OFFICER NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION Charles R. Weeks 61 Chairman of the Board of 1982 Corporation (June 1994 - Present); Chief Executive Officer of Corporation (September 1982 - Present); President of Corporation (September 1982 - June 1994); Vice Chairman of the Board, Citizens Commercial & Savings Bank (June 1987 - Present); Director, Citizens Commercial & Savings Bank (September 1982 - Present); Director, Second National Bank of Saginaw (December 1985 - Present); Director, Commercial National Bank of Berwyn (May 1987 - November 1991). Robert J. Vitito 52 President and Chief 1986 Administrative Officer of Corporation (July 1994 - Present); Executive Vice President of Corporation (July 1986 - July 1994); Director of Corporation and Citizens Commercial & Savings Bank (October 1991 - Present); Chairman of the Board, Second National Bank of Saginaw (January 1987 - Present); Chairman of the Board, President and Chief Executive Officer, Second National Bank of Saginaw (January 1987 - February 1995); Director, Second National Bank of Bay City (January 1987 - Present); Director, State Bank of Standish (December 1988 - Present); Director, Grayling State Bank (December 1988 - Present).
10 14
YEAR BECAME EXECUTIVE OFFICER NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION John W. Ennest 53 Vice Chairman of the Board 1983 of Corporation (October 1991 - Present); Chief Financial Officer and Treasurer of Corporation (July 1994 - Present); Chairman of the Board, Commercial National Bank of Berwyn (August 1992 - Present); Chief Operating Officer of Corporation (October 1991 - July 1994); Chief Executive Officer, Commercial National Bank of Berwyn (August 1992 - February 1994); Executive Vice President of Corporation (March 1983 - October 1991); Director, Citizens Commercial & Savings Bank (June 1987 - Present); Director, Second National Bank of Saginaw (October 1991 - Present); Director, Commercial National Bank of Berwyn (August 1991 - Present); President and Chief Executive Officer, Citizens Commercial & Savings Bank (June 1987 - October 1991). David A. Thomas Jr. 59 Vice Chairman of the Board 1985 of Corporation (January 1995 - Present); Executive Vice President of Corporation (December 1985 - January 1995); Director of Corporation (October 1991 - Present): President and Chief Executive Officer, Citizens Commercial & Savings Bank (October 1991 - Present); Director, Citizens Commercial & Savings Bank (June 1987 - Present); Director, National Bank of Royal Oak (October 1993 - Present); Director, Commercial National Bank of Berwyn (November 1991 - October 1993); Senior Credit Officer, Citizens Commercial & Savings Bank (January 1985 - October 1991); Senior Executive Vice President and Chief Operating Officer, Citizens Commercial & Savings Bank (April 1988 - October 1991).
11 15
YEAR BECAME EXECUTIVE OFFICER NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION Gary O. Clark 54 Executive Vice President of 1986 Corporation (July 1986 - Present); President, Chief Executive Officer, and Director, Commercial National Bank of Berwyn (February 1994 - Present); Director, Citizens Commercial & Savings Bank (October 1991 - February 1994); Senior Executive Vice President, Chief Operating Officer, and Senior Credit Officer, Citizens Commercial & Savings Bank (October 1991 - February 1994); President, Second National Bank of Saginaw (January 1987 - October 1991); Director, Second National Bank of Saginaw (July 1986 - October 1991). Gary P. Drainville 45 Executive Vice President of 1985 Corporation and Citizens Commercial & Savings Bank (December 1993 - Present); Director of Human Resources of Corporation and Citizens Commercial & Savings Bank (December 1985 - Present); Senior Vice President of Corporation and Citizens Commercial & Savings Bank (December 1985 - December 1993). Wayne G. Schaeffer 49 Executive Vice President of 1987 Corporation (December 1993 - Present); Chief Financial Officer and Treasurer of Corporation (August 1988 - July 1994); Senior Vice President of Corporation (August 1988 - December 1993); Director, Citizens Commercial & Savings Bank (November 1994 - Present); Senior Executive Vice President and Chief Operating Officer, Citizens Commercial & Savings Bank (July 1994 - Present); Chief Financial Officer, Citizens Commercial & Savings Bank (December 1985 - July 1994); Executive Vice President, Citizens Commercial & Savings Bank (December 1993 - July 1994); Director, Commercial National Bank of Berwyn (November 1993 - Present).
12 16
YEAR BECAME EXECUTIVE OFFICER NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION Nicholas J. Cilfone 45 Senior Vice President of 1985 Corporation (August 1988 - Present); Executive Vice President and Director, Second National Bank of Saginaw (October 1991 - Present); Senior Vice President, Citizens Commercial & Savings Bank (August 1985 - October 1991). Thomas W. Gallagher 43 Senior Vice President of 1988 Corporation (July 1993 - Present); General Counsel of Corporation (August 1988 - Present); Secretary of Corporation (January 1989 - Present); Vice President of Corporation (August 1988 - July 1993); Senior Vice President and General Counsel, Citizens Commercial & Savings Bank (August 1988 - Present).
All of the companies identified above are subsidiaries of the Corporation. 13 17 EXECUTIVE COMPENSATION The following table provides certain summary information concerning compensation paid or accrued by the Corporation and its subsidiaries, to or on behalf of the Corporation's Chief Executive Officer and each of the four other most highly compensated executive officers (the "Named Officers") of the Corporation (determined as of the end of the last fiscal year) for the fiscal years ended December 31, 1993, 1994 and 1995: SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS PAYOUTS ---------------------- -------------------------------------------- NAME AND PRINCIPAL RESTRICTED STOCK OPTIONS/ LTIP ALL OTHER POSITION YEAR SALARY ($) BONUS ($) AWARD(S) ($) SARS(#) PAYOUTS ($) COMPENSATION(1) ($) - ------------------ ---- ---------- --------- ---------------- -------- ----------- ------------------- Charles R. Weeks 1995 394,711 209,920 --- 36,000 --- 20,473 Chairman and Chief 1994 357,278 134,696 --- --- --- 19,378 Executive Officer 1993 336,390 121,155 273,625(2) --- 1,801,102(3) 17,232 Robert J. Vitito President and Chief 1995 241,442 112,864 --- 51,750 --- 19,916 Administrative 1994 185,378 86,493 --- 18,679 --- 19,083 Officer 1993 159,983 80,000 --- 12,854 --- 17,232 David A. Thomas Jr. 1995 235,662 97,383 --- 49,786 --- 20,955 Vice Chairman 1994 192,072 86,493 --- 21,702 --- 20,080 1993 181,253 80,000 --- 14,936 --- 18,161 John W. Ennest Vice Chairman, Treasurer and 1995 234,414 90,442 --- 50,582 --- 19,982 Chief Financial 1994 225,019 86,493 --- 23,256 --- 19,108 Officer 1993 215,814 80,000 --- 15,522 --- 17,199 Gary O. Clark 1995 160,975 35,874 --- 13,165 --- 17,071 Executive Vice 1994 159,962 47,802 --- 11,463 --- 21,228 President 1993 137,783 46,544 --- 7,855 --- 31,952
- ---------------- (1)The amounts set forth in the "All Other Compensation" column for 1995 represent: (i) contributions of $6,930 to the Corporation's Amended and Restated Section 401(k) Plan on behalf of each of the named executives to match 1995 pre-tax elective deferral contributions (included under Salary) made by such individuals to the Plan; (ii) insurance payments with respect to term life insurance as follows: Mr. Weeks $2,218, Mr. Vitito $1,661, Mr. Ennest $1,727, Mr. Thomas Jr. $2,700, and Mr. Clark $1,727, and (iii) $11,325 paid to each of the named executives for services as a director of the Corporation (except Mr. Clark who does not serve as a director). With respect to the amount shown for Mr. Clark, $8,414 represents relocation assistance payments. (2)Represents the grant date market value of 11,000 shares of restricted stock granted to Mr. Weeks during 1993. The restrictions associated with these shares of Common Stock have been satisfied and as such, these shares have fully vested. The shares are valued at $327,250 as of December 31, 1995, based on the closing price per share of Common Stock on the Nasdaq Stock Market on December 29, 1995. The other Named Officers do not hold any shares of restricted stock of the Corporation. 14 18 (3)Represents cash payment upon exercise of "phantom shares" granted to Mr. Weeks from 1988 through 1991. The amount of such payment is equal to the difference between the fair market value per share of Common Stock on the date of grant and the fair market value per share of Common Stock on the date of exercise multiplied by the number of phantom shares awarded. All of the phantom shares granted to Mr. Weeks have been exercised. STOCK OPTION GRANTS The following table contains information concerning the grant of stock options under the Corporation's Second Amended Stock Option Plan to the Named Officers during 1995:
OPTION/SAR GRANTS IN LAST FISCAL YEAR - --------------------------------------------------------------------------------------------- INDIVIDUAL GRANTS - -------------------------------------------------------------------- POTENTIAL REALIZABLE NUMBER OF % OF TOTAL VALUE AT ASSUMED ANNUAL SECURITIES OPTIONS/ RATE OF STOCK PRICE UNDERLYING SARS APPRECIATION FOR OPTIONS GRANTED TO EXERCISE OR OPTION TERM(3) /SARS EMPLOYEES IN BASE PRICE EXPIRATION ------------- NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($) - --------------------------------------------------------------------------------------------- C.R. Weeks 36,000(1) 9.27% 26.00 03/21/2005 588,646 1,491,742 R.J. Vitito 14,335(2) 3.69% 26.4375 06/09/2002 154,284 359,546 18,415(2) 4.74% 30.3750 06/09/2002 227,714 530,670 19,000(1) 4.89% 26.00 03/21/2005 310,674 787,308 D.A. Thomas Jr. 14,860(2) 3.83% 26.50 06/09/2002 160,312 373,595 18,926(2) 4.87% 30.625 06/09/2002 235,959 549,885 16,000(1) 4.12% 26.00 03/21/2005 261,620 662,996 J.W. Ennest 16,014(2) 4.12% 26.00 06/09/2002 169,501 395,010 20,068(2) 5.17% 30.625 06/09/2002 250,197 583,065 14,500(1) 3.73% 26.00 03/21/2005 237,093 600,840 G.O. Clark 8,165(2) 2.10% 29.875 06/09/2002 99,303 231,419 5,000(1) 1.29% 26.00 03/21/2005 81,756 207,186
(1)These stock options are non-qualified stock options granted pursuant to the Second Amended Stock Option Plan of the Corporation. The options are exercisable in whole or in part during the term thereof once vested, beginning September 21, 1995. Generally such options become vested on a graduated basis in accordance with a pre-determined option vesting schedule which is based upon a rolling average 4 quarter return on average assets ratio ("ROA") for the Corporation with a minimum vesting of 10% upon the Corporation's achieving a 1.11% ROA and a 100% vesting upon the Corporation's achieving an ROA of 1.20%. The options granted to Mr. Weeks vest in accordance with the above described schedule except that such options will vest fully on the last business day preceding his retirement from the Corporation. (2)These stock options are non-qualified stock options which were automatically granted as reload options pursuant to the provisions of the Performance Partnership Program ("PPP") of the Corporation which has been established under the Corporation's Second Amended Stock Option Plan. Under the PPP, initial grants of non-qualified stock options ("Initial Grants") were made to such participants in 1992 in connection with their agreement to participate in the PPP. The provisions of the PPP require a participant to contribute currently owned shares of Common 15 19 Stock to the PPP and to subject such shares together with shares subsequently acquired under the PPP to certain transfer restrictions. Under the PPP, the vested portion of the Initial Grant is automatically exercised by the administrator pursuant to an automatic stock-for-stock exchange procedure utilizing the shares then credited to the participant's account provided that the spread between the exercise price and the fair market value of the Common Stock at such time will result in a gain of at least a specified number of shares and at least six months and one day have lapsed since the last such exercise. Each time a portion of the Initial Grant or a subsequently granted reload option is exercised, a participant will automatically receive an additional reload option to purchase a number of shares equal to the number of shares received upon exercise less the number of shares realized as a gain from the transaction. Reload options become fully exercisable six (6) months after grant, expire June 9, 2002 and have an exercise price equal to the fair market value per share of Common Stock on the date the reload option is granted. (3)Such "potential realizable values" represent the value of such options at the end of their term, assuming a 5% and 10% appreciation in the price of the Common Stock compounded annually over the term without discounting for inflation. The actual value of such options is dependent upon actual appreciation in the market price of the Common Stock during the term of the options. OPTION/SAR EXERCISES AND HOLDINGS The following table provides information, with respect to the Named Officers, about the exercise of options and/or SARs during the last fiscal year, and the unexercised options and SARs held as of the end of the fiscal year: AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS AT SHARES YEAR END (#) FISCAL YEAR END ($) ACQUIRED ON VALUE -------------------------- -------------------------------- NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------------------------------------------------------------------------------------------------ C.R. Weeks -0- -0- 82,560 28,440 935,475 106,650 R.J. Vitito 59,505 655,795 85,715 33,425 1,075,247 56,287 D.A. Thomas Jr. 48,245 412,736 31,632 31,566 108,103 47,400 J.W. Ennest 73,464 742,133 118,319 31,523 1,724,616 42,956 G.O. Clark 38,526 645,345 49,461 3,950 507,520 14,812
16 20 PENSION PLANS The following table shows the estimated annual pension benefits payable to the Named Officers at normal retirement age(1) under the Corporation's qualified defined benefit pension plan, based on remuneration that is covered under the plan and years of service with the Corporation and its subsidiaries:
PENSION PLAN TABLE Years of Credited Service ----------------------------------------------- Remuneration(2) 15 20 25 30 35 - ---------------------------------------------------------------- $ 75,000 $16,000 $ 22,000 $ 27,000 $ 33,000 $ 38,000 115,000 27,000 36,000 45,000 54,000 64,000 155,000 38,000 51,000 63,000 76,000 89,000 195,000 49,000 65,000 81,000 98,000 114,000 235,000 60,000 80,000 99,000 119,000 139,000 275,000 70,000 94,000 117,000 141,000 164,000 315,000 80,000 123,000 135,000 162,000 189,000
- ------------------ (1)Normal retirement age is the later of age 65 or the fifth anniversary of the participant's entry into the plan. (2)The law in effect throughout calendar year 1995 limits remuneration considered for benefit purposes to $150,000. Mr. Weeks and Mr. Thomas Jr. have supplemental plans that pay benefits based upon earnings in excess of the pension plan limitations, which plans are described below. A participant's remuneration covered by the Corporation's pension plan is his or her "average monthly compensation," which is computed over the 60 consecutive months of the participant's last 120 months in which he or she received the greatest compensation, multiplied by 12 months. For this purpose, compensation is defined as the participant's base salary, exclusive of bonuses, overtime and fringe benefits, but includes the participant's 401(k) salary reduction contributions. Covered remuneration for the named executives as of the end of the last calendar year is $150,000 for all such named executives. The estimated credited years of service for each named executive is as follows: Mr. Weeks, 13; Mr. Ennest, 13; Mr. Thomas Jr., 11; Mr. Vitito, 28; and Mr. Clark, 21. Benefits are computed as a straight single life annuity beginning at normal retirement age and are not subject to offset for social security or other benefits. The Corporation has an agreement with Mr. Weeks which in part is designed to replace certain accrued retirement benefits which he forfeited upon termination of employment with his former employer. The agreement provides that Mr. Weeks shall be entitled to receive a retirement benefit at age 65 equal to 48% of his highest annual base salary during his final ten years of employment with appropriate percentage reductions in the event of early retirement before age 65. That portion of this retirement benefit not covered by the Corporation's pension plan is covered by a supplemental retirement benefits plan for Mr. Weeks. Under the combined plans, the estimated annual benefits payable to Mr. Weeks upon retirement at normal retirement age (65 in the case of Mr. Weeks) would be approximately $210,272. Citizens Commercial & Savings Bank, a wholly owned subsidiary of the Corporation has an agreement with Mr. Thomas Jr. which provides that Mr. Thomas Jr. shall be entitled to receive a retirement benefit at age 65 equal to 48% of his average annual base salary over the consecutive 60-month period in which he received the highest compensation during his final 120 months of employment with appropriate percentage reductions in the event of early retirement before age 65. That portion of the retirement benefit not covered by the 17 21 Corporation's pension plan and social security are covered by a supplemental retirement benefits plan for Mr. Thomas Jr.. Under the combined plans the estimated annual benefits payable to Mr. Thomas Jr. upon retirement at normal retirement age (65 in the case of Mr. Thomas Jr.) would be approximately $113,518. COMPENSATION AND BENEFITS COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation and Benefits Committee of the board of directors of the Corporation (the "Committee") consists of five directors who are not employed by the Corporation and are not eligible to participate in any of the Corporation's benefit plans other than the Stock Option Plan for Directors. The following report is submitted by the Committee. OVERVIEW AND PHILOSOPHY The Committee, pursuant to authority delegated by the board of directors of the Corporation, is responsible for determining and implementing compensation and benefit systems for executive officers and other employees of the Corporation. The Committee determines the annual salaries and other compensation for executive officers based upon recommendations from the Chairman and Chief Executive Officer, the President and Chief Administrative Officer, as well as information from the Corporation's Human Resources Department and independent outside consultants. The Committee's determinations relating to executive compensation are intended to: * align the financial interests of the executive officers with the long term interests of the Corporation's shareholders; * attract and retain high performing executive officers to lead the Corporation to greater levels of profitability; and * motivate executive officers to attain the Corporation's performance goals by placing a significant portion of such officers' financial reward at risk relative to achievement of Corporate goals. In furtherance of these objectives, the compensation package structured for the Corporation's executive officers has three primary components: base compensation (including salary, pension and welfare benefits and perquisites), annual cash awards under the Management Incentive Plan ("MIP") for performance during the previous year, and long term, stock-based compensation generally awarded under the Corporation's Second Amended Stock Option Plan (the "Option Plan"). BASE COMPENSATION Given the Committee's continuing emphasis on performance-based long term and short term compensation, base compensation for executive officers has been established by the Committee at competitive levels based upon information available to the Committee relating to compensation for corresponding executive positions at similarly situated financial institutions. Executive officer salaries are evaluated by the Committee on an annual basis utilizing information from independent outside compensation consultants, the Corporation's 18 22 Human Resources Department and input from the Chairman and Chief Executive Officer and the President and Chief Administrative Officer. To determine the actual base salary for each executive officer, the Committee also takes into account individual performance, experience and unique contributions or needs for certain expertise required by the Corporation. Base Compensation of Chief Executive Officer. In December 1994, the Committee reviewed Mr. Weeks' performance for 1994 and awarded him a 10.51% merit increase effective January 1, 1995. The Committee noted that, in its opinion, Mr. Weeks' leadership has directly resulted in significant growth for the Corporation together with substantial enhancement of shareholder value. The Committee also noted that the Corporation had again achieved record earnings in 1994 while continuing to maintain a high quality balance sheet. MANAGEMENT INCENTIVE PLAN All of the Corporation's executive officers participate in the MIP. The MIP is designed to motivate participating officers of the Corporation and its subsidiaries to attain goals based upon net earnings of the Corporation and its subsidiaries and the achievement of individual objectives. The amount of an individual's MIP award is a function of (i) the midpoint of the salary range for the individual's position, (ii) the "participation rate" established by the Committee for the individual, (iii) the performance of the Corporation or the subsidiary for which the individual has responsibility, and (iv) the extent to which the individual achieved agreed-upon objectives for the year. Each of these factors is described below. Midpoint of Salary Range and Participation Rate. As described under "Base Compensation," the Committee determines a salary range for each executive officer's position based upon competitive factors. Similarly, the Committee assigns a "participation rate" to each position based on the same factors ranging from 6% for lower level executive officers to 45% for the Chief Executive Officer. The participation rate multiplied by the midpoint of the individual's salary range is that individual's "Award Base" under the MIP, which is subject to adjustment based on Corporate and individual performance as described below. Corporate Performance. As a general practice under the MIP, no amounts will be awarded unless the Corporation's net earnings for the year equal or exceed (i) 90% of the profit plan target approved by the Corporation's board of directors for that year and (ii) 100% of the previous year's earnings (the greater of these amounts is referred to as the "Threshold"). Nonrecurring expenses or income items affecting earnings are evaluated and may be excluded in the discretion of the Committee from the profit plan earnings calculation to the extent of management's inability to control such items. A similar formula based upon subsidiary earnings applies to participants who participate wholly or partially on a subsidiary level basis. With the exception of Mr. Clark, during 1995, the Named Officers participated in the MIP based only on the earnings of the consolidated Corporation. Mr. Clark's participation was based 25% on Corporate performance and 75% on the performance of Commercial National Bank of Berwyn, a wholly owned subsidiary of the Corporation for which Mr. Clark is principally responsible. Earnings below the profit plan target but higher than the Threshold automatically reduce the Award Base while earnings above the profit plan target automatically increase the Award Base. For 1995, the Corporation's net operating earnings exceeded both 1994 earnings (by over 14%) and the profit plan target. Individual Objectives. Individual executive performance also significantly affects the amount of a participant's individual award. Annually, each executive officer establishes objectives, subject to approval by the officer's supervisor. Depending upon the extent to which these objectives are achieved during the year, a participant will be eligible to receive from 0 to 150 percent of the Award Base, adjusted for Corporate performance as described above. 19 23 Chief Executive Officer Award. Mr. Weeks received an award of $209,920 under the MIP for his 1995 performance on the same basis as the other executive officers. As noted above, the Corporation exceeded the profit plan target for 1995, thereby increasing his Award Base. Mr. Weeks' primary individual MIP objective was to have the Corporation's earnings reach the 1995 profit plan target. The Committee noted that the Corporation's operating earnings during 1995 exceeded any year in its history and that the Corporation's Common Stock had a total return of approximately 10.5% for the year. Another significant individual objective of Mr. Weeks was to complete effective March 1, 1995 the acquisition of the Banc One Corporation banks headquartered in Fenton, Ypsilanti, East Lansing and Sturgis, Michigan. The Committee noted that the acquisition had been completed in a timely manner, that the acquired banks had been successfully and efficiently integrated into the Corporation's operations and that the acquired banks had a positive impact on fourth quarter earnings in 1995 which exceeded management's expectations. Further, the Committee noted that, on a combined basis, the four banks acquired have added approximately $670 million in additional assets to the Corporation's balance sheet, bringing the total asset base of the Corporation to approximately $3.5 billion at year end. The Committee concluded that Mr. Weeks had exceeded the profit plan target for 1995 and had successfully acquired and integrated the Banc One Corporation banks into the operations of the Corporation, thereby entitling him to 100% of his adjusted Award Base. LONG TERM STOCK-BASED COMPENSATION The Option Plan provides for a variety of different types of compensation arrangements, such as stock options, restricted stock and stock appreciation rights, which increase in value as the value of the Common Stock increases. The purpose of these and similar long term compensation arrangements is to more closely align the financial interests of executive officers and other key employees with the long term interests of the Corporation's shareholders by linking a significant portion of their compensation directly to stock price growth or decline. In furtherance of such purpose, the Committee generally makes annual grants to executive officers of stock options with an exercise price equal to the fair market value of the Common Stock on the date of grant. Such options vest and generally become exercisable as the Corporation's return on average assets increases in accordance with a vesting schedule pertaining to such option grants. This year the Committee adopted new option grant guidelines to reflect competitive practices of other similarly situated financial institutions. These guidelines, implemented by the Committee with the assistance of the Corporation's outside compensation consultants, employ a modified Black-Scholes option valuation model to estimate the present value of long term incentive compensation for corresponding executive positions at similarly situated and performing financial institutions. A similar analysis is performed to determine the comparative value of an option to be awarded under the Option Plan. Based upon this information and other information concerning compensation practices within the financial services industry, an appropriate participation rate for each of the executive officers in the Plan is assigned. The option grant size for each executive officer is then determined by dividing the product of the position's salary mid-point and participation rate by the current market price of Common Stock, subject to being increased or decreased by the Committee based upon its evaluation of the officer's individual performance. Other options received by the executive officers during 1995 were reload grants made automatically under the provisions of the PPP. Chief Executive Officer Long Term Compensation - During 1995 an option grant in the amount of 36,000 shares was made to Mr. Weeks in accordance with the formula described above. Mr. Weeks did not participate in the PPP during 1995 and therefore did not receive reload options thereunder. 20 24 $1,000,000 Cap - The Omnibus Budget Reconciliation Act of 1993 prohibits a publicly owned company from deducting more than $1,000,000 in annual compensation (including gain from the exercise of certain stock and option grants) paid to the chief executive officer or any of the next four most highly compensated executive officers. Certain exceptions apply involving performance based compensation and the maximum amount of compensation that can be paid pursuant to a plan. In addition, a transition rule exempts exercises of options granted under the Option Plan prior to the 1997 annual meeting of shareholders. The Corporation does not anticipate that any of its executive officers will receive more than $1,000,000 in compensation during 1996. The Committee intends to recommend changes to the Option Plan in order to minimize the effect of the $1,000,000 limitation on the tax deductibility of gain from the exercise of stock options. The Committee may also recommend changes in other compensation plans and changes with respect to other facets of the Option Plan to maximize the tax deductibility of compensation paid pursuant to such plans if practicable and in the best interests of the Corporation and its shareholders. However, the Committee believes it is important to maintain the flexibility to take actions regarding executive compensation which it considers to be in the best interests of the Corporation and its shareholders, which may be based on considerations in addition to whether the compensation will be tax deductible. As a result, it is possible that in the future, circumstances may cause the Committee to authorize compensation that is not entirely deductible. HUGO E. BRAUN JR. VICTOR E. GEORGE LAWRENCE O. ERICKSON JAMES E. TRUESDELL JR. KENDALL B. WILLIAMS 21 25 SHAREHOLDER RETURN Set forth below is a graph which summarizes the cumulative return experienced by the Corporation's shareholders over the last five years compared to the S&P 500 Index and the Keefe, Bruyette & Woods, Inc. 50 Bank Index. Such presentation assumes that the value of the investment in the Corporation's Common Stock and each index was $100 on December 31, 1990 and that all dividends were reinvested. CUMULATIVE TOTAL RETURNS FIVE YEARS ENDED DECEMBER 31, 1995
Citizens KBW 50 S&P 500 1990 $100 $100 $100 1991 $150 $158 $130 1992 $216 $202 $140 1993 $291 $213 $155 1994 $333 $202 $157 1995 $369 $324 $215
22 26 COMPENSATION COMMITTEE INTERLOCKS AND CERTAIN TRANSACTIONS AND RELATIONSHIPS COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Hugo E. Braun Jr., Lawrence O. Erickson, Victor E. George, James E. Truesdell Jr., and Kendall B. Williams served on the Compensation and Benefits Committee of the board of directors of the Corporation throughout the last completed fiscal year. None of these individuals are employees of the Corporation. Committee member Braun is a partner in the law firm of Braun Kendrick Finkbeiner which rendered legal services to certain of the Corporation's banking subsidiaries during 1995. Such subsidiaries plan to employ this firm for additional services in 1996. OTHER TRANSACTIONS WITH OFFICERS AND DIRECTORS During 1995 the banking subsidiaries of the Corporation had, and expect to have in the future, banking transactions, in the ordinary course of business, with directors, officers and their associates. These transactions were made on substantially the same terms, including interest rate charges and collateral requirements, as comparable transactions made with unrelated parties prevailing at the time of such transactions and did not involve more than the normal risk of collectability or present other unfavorable features. During 1995, the firm of Winegarden, Shedd, Haley, Lindholm & Robertson, of which director William C. Shedd is a partner, rendered legal services to the Corporation and its banking subsidiaries. The Corporation and its banking subsidiaries paid that firm $178,062 in legal fees and reimbursements. The Corporation and its subsidiaries expect to employ this firm for services in 1996. SECURITIES TRANSACTIONS REPORTING Under the securities laws of the United States, the Corporation's directors, executive officers and any persons holding more than 10% of the Common Stock (collectively, the "Reporting Persons") are required to report their ownership of the Common Stock and any changes in that ownership to the Commission and to the Nasdaq Stock Market ("Nasdaq"). Specific due dates for these reports have been established and pursuant to applicable rules, the Corporation is required to report in its proxy statement any failure to file by these due dates. Based on corporate records and certifications received from the Reporting Persons, all required reports of Reporting Persons have been timely filed with the Commission and the Nasdaq. In making these statements, the Corporation has relied on the written representations of its directors, executive officers and its principal shareholder and on copies of the reports that such persons have filed with the Commission. INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS In 1995, Ernst & Young LLP, performed audit and audit related services for the Corporation and its subsidiaries which included examination of the consolidated financial statements of the Corporation, and consultation with the Corporation and its subsidiaries on accounting and reporting matters. Upon recommendation of the audit committee, the board of directors has again selected Ernst & Young LLP, as independent auditors. Representatives of Ernst & Young LLP, will attend the annual meeting, will have an opportunity to make a statement, and will be available to answer questions that may be asked by shareholders. 23 27 SHAREHOLDER PROPOSALS Any proposal by a shareholder of the Corporation to be considered for inclusion in the Proxy Statement for the 1997 annual meeting must be received by Thomas W. Gallagher, the secretary of the Corporation, by the close of business on November 15, 1996. ANNUAL REPORTS Appendix A to this Proxy Statement contains the information required to be included in an annual report pursuant to the rules of the Commission, including audited financial statements, management's discussion and analysis of financial condition and results of operations and five year selected financial data. Upon request, the Corporation will provide without charge a copy of its annual report on FORM 10-K. OTHER MATTERS The board of directors is not aware of any other matters which may come before the meeting. However, should any such matters properly come before the meeting, it is the intention of the persons named in the accompanying proxy to vote in accordance with their judgment on such matters. CITIZENS BANKING CORPORATION Thomas W. Gallagher Thomas W. Gallagher Senior Vice President, General Counsel and Secretary Flint, Michigan March 14, 1996 24 28 APPENDIX A CITIZENS BANKING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS AND CONSOLIDATED FINANCIAL STATEMENTS 29 TABLE OF CONTENTS I. Financial Review including Management's Discussion and Analysis ............ 1 Selected Financial Data ....................... 1 Performance Summary ........................... 2 Net Interest Income ........................... 2 Provision and Allowance for Loan Losses ....... 5 Noninterest Income and Expense ................ 6 Balance Sheet Review .......................... 9 Liquidity and Debt Capacity, Interest Rate Risk and Impact of Inflation ...................... 15 Year Ended December 31, 1994 Compared with 1993 ........................... 18 II. Consolidated Financial Statements ................. 19 Consolidated Balance Sheets ................... 19 Consolidated Statements of Income ............. 20 Consolidated Statements of Changes in Shareholders' Equity ...................... 21 Consolidated Statements of Cash Flow .......... 22 III. Notes to Consolidated Financial Statements ........ 23 IV. Report of Independent Auditors .................... 36 V. Report of Management .............................. 37
30 TABLE 1. SELECTED FINANCIAL DATA
(in thousands except per share data) 1995(4) 1994 1993(2) 1992(1) 1991 - ----------------------------------------------------------------------------------------------------------------- FOR THE YEAR Net interest income $137,495 $118,400 $104,334 $99,975 $99,231 Provision for loan losses 6,441 5,303 5,597 6,251 6,086 Investment securities gains (losses) 198 157 763 (17) 19 Noninterest income 36,236 33,697 30,452 27,082 26,509 Noninterest expense 121,087 107,245 97,268 92,555 93,509 Income taxes 12,805 10,292 6,914 4,765 5,089 Income before cumulative effect of change in accounting principle 33,596 29,414 25,770 23,469 21,075 Net income 33,596 29,414 25,770 10,564 21,075 Cash dividends 12,770 11,557 9,937 9,027 8,427 PER COMMON SHARE DATA Primary: Income before cumulative effect of change in accounting principle $2.31 $2.03 $1.88 $1.77 $1.60 Net income 2.31 2.03 1.88 0.79 1.60 Fully diluted: Income before cumulative effect of change in accounting principle 2.30 2.03 1.87 1.75 1.60 Net income 2.30 2.03 1.87 0.79 1.60 Cash dividends 0.900 0.820 0.745 0.690 0.645 Book value, end of year 20.73 18.31 18.08 16.73 16.68 Market value, end of year 29.75 27.75 25.00 19.25 13.88 AT YEAR END Assets $3,463,922 $2,703,823 $2,714,112 $2,498,934 $2,492,584 Loans 2,428,513 1,816,221 1,780,180 1,557,423 1,536,461 Deposits 2,864,701 2,252,318 2,246,750 2,086,144 2,064,024 Long-term debt 105,411 5,249 10,865 15,093 20,405 Shareholders' equity 297,186 258,730 255,163 219,276 218,183 AVERAGE FOR THE YEAR Assets $3,279,646 $2,710,747 $2,535,068 $2,472,245 $2,449,897 Earning assets 3,002,753 2,500,215 2,348,691 2,290,884 2,276,390 Loans 2,302,414 1,797,153 1,643,327 1,539,332 1,545,108 Deposits 2,702,346 2,262,182 2,109,269 2,061,613 2,035,156 Interest-bearing deposits 2,250,711 1,882,451 1,783,718 1,769,078 1,759,965 Repurchase agreements and other short-term borrowings 146,000 141,230 138,375 135,624 143,012 Long-term debt 102,813 8,667 13,112 16,965 29,726 Shareholders' equity 277,597 256,607 231,160 210,193 210,931 FINANCIAL RATIOS Return on average:(3) Shareholders' equity 12.10% 11.46% 11.15% 11.17% 9.99% Earning assets 1.12 1.18 1.10 1.02 0.93 Assets 1.02 1.09 1.02 0.95 0.86 Average shareholders' equity/ave. assets 8.46 9.47 9.12 8.50 8.61 Dividend payout ratio(3) 38.01 39.29 38.56 38.46 39.99 Net interest margin (FTE) 4.77 4.99 4.74 4.71 4.67 Tier I leverage 6.65 9.52 8.90 8.57 8.48 Risk-based capital (fully phased-in guidelines): Tier I capital 8.79 13.44 13.12 12.73 13.11 Total capital 10.04 14.69 14.36 13.90 14.35
- -------------------------------------------------------------------------------- (1) 1992 income and income per common share were affected by nonrecurring items. Nonrecurring items included restructuring expenses related to the leasing subsidiary, employee benefit costs related to adopting the accrual method of accounting for retiree benefits and a curtailment gain resulting from modification of retiree benefit plans. If the nonrecurring items had been excluded from the results of operations for 1992, income before cumulative effect of change in accounting principle would have been reduced by $1.152 million or $0.08 per fully diluted share. (2) The year 1993 reflects the acquisition of National Bank of Royal Oak ("NBRO"), accounted for as a purchase, and includes NBRO'S results of operations and financial results subsequent to its October 1, 1993 acquisition date. (3) Based on income before cumulative effect of change in accounting principle. (4) The year 1995 reflects the acquisition of the Michigan affiliates of Banc One Corporation accounted for as a purchase, and includes the related results of operations and financial results subsequent to the February 28, 1995 acquisition date. Page 1 31 PERFORMANCE SUMMARY The following discussion provides a more comprehensive review of the Corporation's operating results and financial condition than could be obtained from reading the Consolidated Financial Statements alone. Citizens Banking Corporation earned $33,596,000 or $2.30 per fully diluted share during 1995 compared with $29,414,000 or $2.03 per share in 1994. Net income was up $4,182,000 or $0.27 per fully diluted share over the prior year and reflected a 14.2% increase in net income. This marked the Corporation's thirteenth consecutive year of increased net operating income and eighth consecutive year of record earnings. The Corporation's 1995 results reflect ten months of operations for the four Michigan affiliates of Banc One Corporation purchased at the close of business on February 28, 1995. The transaction was accounted for as a purchase and the four banks ("acquired banks") were merged into Citizens Commercial & Savings Bank headquartered in Flint, Michigan effective immediately after the acquisition. Total assets acquired of $670 million included net loans of $532 million and investment securities and money market investments of $57 million. Cost-in-excess of the fair value of identifiable net assets acquired ("intangible assets") of $59.2 million and is being amortized over 15 years. Return on average assets was 1.02% in 1995, a decrease from 1.09% in 1994. The decline in the Corporation's return on assets is primarily attributable to additional interest expense, intangible asset amortization costs and nonrecurring systems conversions costs associated with the acquired banks. Systems integration and conversion of the acquired banks to Citizens' corporate systems was completed in the second and third quarters of 1995, and as a result the acquisition was accretive to earnings in the fourth quarter. Return on average equity improved to 12.10% in 1995 compared with 11.46% last year. Average shareholders' equity was $277.6 million or 8.46% of total average assets for 1995 compared with $256.6 million or 9.46% for 1994. The Corporation's risk-based capital levels exceeded all regulatory requirements. An analysis of changes in major income statement components in 1995 from 1994 is presented below. Overall, the increase in net income reflects improvement in net interest income and noninterest income, offset, in part, by increases in noninterest expense and income taxes. Higher levels of earning assets, primarily loans and leases, resulted in higher net interest income. Additional data on the Corporation's performance during the past five years appears in Table 1.
- ----------------------------------------------------------------------------- Year Ended December 31, Changes in 1995 ------------------------ ------------------- (in thousands) 1995 1994 Amount Percent - ----------------------------------------------------------------------------- Interest income $240,600 $179,989 $60,611 33.7% Interest expense 103,105 61,589 41,516 67.4 -------- -------- ------- Net interest income 137,495 118,400 19,095 16.1 Provision for loan losses 6,441 5,303 1,138 21.5 Noninterest income 36,434 33,854 2,580 7.6 Noninterest expense 121,087 107,245 13,842 12.9 Income taxes 12,805 10,292 2,513 24.4 -------- -------- ------- Net income $ 33,596 $ 29,414 $ 4,182 14.2 ======== ======== =======
NET INTEREST INCOME The largest segment of the Corporation's operating income is net interest income, which is the sum of interest and certain fees derived from earning assets minus interest paid on deposits and other funding sources. Net interest income is impacted by changes in the volume and mix of earning assets and funding sources, market rates of interest, demand for loans and the availability of deposits. Other factors, such as Federal Reserve Board monetary policy and changes in tax laws, may also have an impact on changes in net interest income from one period to another. Average balances and rates on major categories of interest-earning assets and interest-bearing liabilities during the past three years appear in Table 2. Total average earning assets were 19.9% higher during 1995 compared with 1994 primarily due to the purchase of the acquired banks. The composition of average earning assets changed in 1995 as total average loans increased $505 million to 76.7% of average earning assets from 71.9% in 1994. Average investment securities including money market investments represented 23.3% of average earning assets in 1995 compared with 28.1% in 1994. Total average interest-bearing liability balances increased Page 2 32 TABLE 2. AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1995 1994 1993 ------------------------------ ------------------------------ ------------------------------ Year Ended December 31 AVERAGE AVERAGE Average Average Average Average (in millions) BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2) Balance Interest(1) Rate(2) - --------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Money market investments: Time deposits with banks $ 4.9 $ 0.3 5.87% $ 5.4 $ 0.2 4.65% $ 12.8 $ 0.4 3.30% Federal funds sold 74.1 4.4 6.01 43.0 1.9 4.46 46.5 1.4 3.04 Term federal funds sold and other 47.2 2.7 5.69 5.1 0.3 5.21 8.3 0.3 3.64 Investment securities(3): Taxable 402.1 22.5 5.60 447.9 22.7 5.07 393.9 19.6 4.96 Nontaxable 175.4 9.4 8.30 208.1 10.6 7.86 243.9 11.7 7.31 Loans(4): Commercial 902.4 81.9 9.17 756.2 59.7 8.01 657.8 48.4 7.51 Real estate 436.1 36.2 8.29 389.7 31.8 8.16 388.8 32.7 8.40 Consumer installment 900.1 79.0 8.78 569.4 47.3 8.30 503.1 45.2 8.99 Lease financing 63.8 4.2 6.55 81.9 5.5 6.71 93.6 6.7 7.16 -------- ------ -------- ------ -------- ------ Total earning assets(3) 3,006.1 240.6 8.20 2,506.7 180.0 7.45 2,348.7 166.4 7.39 NONEARNING ASSETS Cash and due from banks 141.6 124.3 109.7 Premises and equipment 61.9 53.6 49.4 Other assets 102.4 49.8 47.9 Allowance for loan losses (32.4) (23.7) (20.6) -------- -------- -------- Total assets $3,279.6 $2,710.7 $2,535.1 ======== ======== ======== INTEREST-BEARING LIABILITIES Deposits: Interest-bearing demand $ 309.4 5.8 1.87 $ 256.1 4.4 1.71 $ 238.5 5.0 2.08 Savings 909.7 25.6 2.82 909.4 21.7 2.39 832.4 21.3 2.56 Time 1,031.6 56.8 5.50 717.0 29.9 4.17 712.8 31.0 4.35 Short-term borrowings 146.0 7.2 4.95 141.2 5.1 3.62 138.4 4.2 3.04 Long-term debt 102.8 7.7 7.52 8.7 0.5 5.24 13.1 0.6 4.74 -------- ------ -------- ------ -------- ------ Total interest-bearing liabilities 2,499.5 103.1 4.12 2,032.4 61.6 3.03 1,935.2 62.1 3.21 NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 451.6 379.7 325.6 Other liabilities 50.9 42.0 43.1 Shareholders' equity 277.6 256.6 231.2 -------- -------- -------- Total liabilities and shareholders' equity $3,279.6 $2,710.7 $2,535.1 ======== ======== ======== NET INTEREST INCOME $137.5 $118.4 $104.3 ====== ====== ====== NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.77% 4.99% 4.74%
(1) Interest income is shown on an unadjusted basis and therefore does not include taxable equivalent adjustments. (2) Average rates include taxable equivalent adjustments to interest income of $5,983,000, $6,684,000 and $7,003,000 for the years ended December 31, 1995, 1994, and 1993, respectively, based on a 35% tax rate. (3) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. (4) Nonaccrual loans are included in average balances. Page 3 33 23.0% in 1995 compared to 1994, while average noninterest-bearing deposit balances increased 18.9%. The average yield on earning assets improved 75 basis points to 8.20% in 1995. Yields increased in all categories of earning assets except lease financing, in response to the higher interest rate environment. The cost of interest-bearing liabilities increased 109 basis points to 4.12% in 1995 from 3.03% in 1994. This increase was attributable to $115 million of long term debt incurred to fund the first quarter 1995 acquisition and higher deposit costs, primarily from savings and time accounts. Long-term debt comprised 3.4% of total funding sources during 1995, compared with 0.4% in 1994. Additionally, the weighted average rate on all long-term debt increased to 7.52% in 1995 from 5.24% in 1994. The increased costs on interest bearing liabilities more than offset increased yields on earning assets causing the interest spread on earning assets (the difference between the average yield on earning assets and the average rate on interest-bearing liabilities) to decrease from 4.42% in 1994 to 4.08% in 1995. As a result, net interest margin decreased from 4.99% in 1994, to 4.77% in 1995, a 22 basis point decline. The effect on net interest income of changes in average balances ("volume") and yields and rates ("rate") are quantified in Table 3. As shown, net interest income improved in 1995 due to volume-related increases primarily attributable to the February 28, 1995 acquisition which provided $16.6 million of the volume related increase. Higher costs of interest-bearing liabilities offset the effects of increased asset yields resulting in unfavorable rate related variances of $2.0 million. In the latter part of 1995 and again in early 1996, the Federal Reserve Board lowered the federal funds rate. As a result money market interest rates declined and the Corporation lowered it's prime lending rate. Management continually monitors the Corporation's balance sheet to insulate net interest income from significant swings caused by interest rate volatility. If market rates continue to decrease in 1996, corresponding changes in funding costs would be considered to avoid a negative impact on net interest income. The Corporation's policies in this regard are further discussed in the section titled "Interest Rate Risk". TABLE 3. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1995 COMPARED TO 1994 1994 Compared to 1993 --------------------------------- --------------------------------- INCREASE (DECREASE) Increase (Decrease) DUE TO CHANGE IN Due to Change in Year Ended December 31 NET -------------------- Net -------------------- (in millions) CHANGE(1) RATE (2) VOLUME Change(1) Rate (2) Volume - ----------------------------------------------------------------------------------------------------- INTEREST INCOME: Money market investments: Time deposits with banks $0.1 $0.1 $(0.0) $(0.2) $--- $(0.2) Federal funds sold 2.5 1.1 1.4 0.5 0.6 (0.1) Term federal funds sold 2.4 0.2 2.2 0.0 0.1 (0.1) Investment securities: Taxable (0.2) 1.8 (2.0) 3.1 0.9 2.2 Tax-exempt (1.2) 0.5 (1.7) (1.1) 0.8 (1.9) Loans 57.0 16.2 40.8 11.3 (1.9) 13.2 ---- ---- ---- ---- ----- ---- Total 60.6 19.9 40.7 13.6 0.5 13.1 ---- ---- ---- ---- ----- ---- INTEREST EXPENSE: Deposits: Demand 1.4 0.4 1.0 (0.6) (0.9) 0.3 Savings 3.9 4.1 (0.2) 0.4 (1.9) 2.3 Time 26.9 13.2 13.7 (1.1) (1.6) 0.5 Short-term borrowings 2.1 1.9 0.2 0.9 0.8 0.1 Long-term debt 7.2 2.3 4.9 (0.1) 0.1 (0.2) ---- ---- ---- ---- ----- ---- Total 41.5 21.9 19.6 (0.5) (3.5) 3.0 ---- ---- ---- ---- ----- ---- NET INTEREST INCOME $19.1 $(2.0) $21.1 $14.1 $4.0 $10.1 ===== ===== ===== ===== ==== =====
(1) Changes are based on actual interest income and do not reflect taxable equivalent adjustments. (2) Rate/Volume variances are allocated to changes due to rate. Page 4 34 PROVISION AND ALLOWANCE FOR LOAN LOSSES Management provides for possible loan losses at a level determined adequate based upon judgements regarding historical loss experience, the financial condition of borrowers, the size and composition of the loan portfolio, the level and composition of nonperforming loans, estimated future net charge-offs, present and anticipated economic conditions and other factors. A summary of the Corporation's loan loss experience from 1991 through 1995 appears in Table 4. Management increased the provision for loan losses in 1995 by $1.1 million from 1994, primarily due to the acquisition of the four banks. Net loan charge-offs were 0.16% of average loans in 1995, down from 0.17% in 1994 and below peer group levels. The ability to cover loan charge-offs improved during the year as the ratio of the allowance for loan losses to net loans charged off increased to 9.6 times at December 31, 1995 compared with 7.9 times as of December 31, 1994. At year end, the allowance for loan losses was $34.8 million or 1.43% of total loans, up $10.1 million from 1.36% at December 31, 1994. The increase is attributable to a higher loan loss provision in 1995 as compared to 1994 and the addition of the $7.2 million allowance of the acquired banks. Gross charge-offs increased $1.8 million, or 29.6% from 1994, partially due to charge-offs related to the acquired banks. Recoveries on loans previously charged off increased 44.5% compared to the prior year, resulting in a slight decline in the ratio of net charge-offs to average loans outstanding. The ratio of net charge-offs to average loans for each of the loan portfolios except commercial decreased compared with the prior year as follows: commercial (0.16% versus 0.06%), mortgage (0.01% versus 0.02%), consumer (0.14% versus 0.27%) and leasing (0.70% versus 1.22%). The Corporation maintains formal policies and procedures to control and monitor credit risk. Management believes the allowance for loan losses is adequate to meet presently known credit risks in the loan portfolio. The Corporation's loan portfolio has no significant concentrations in any one industry nor any exposure in foreign loans. TABLE 4. SUMMARY OF LOAN LOSS EXPERIENCE
Year Ended December 31 (in thousands) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------- Allowance for loan losses - January 1 $24,714 $22,547 $19,404 $19,759 $19,448 Allowance of acquired banks 7,235 --- 1,642 --- --- Provision for loan losses 6,441 5,303 5,597 6,251 6,086 CHARGE-OFFS: Commercial 2,971 1,869 2,629 2,781 2,125 Real estate(1) 69 72 403 946 668 Consumer installment 4,362 3,020 3,182 4,169 4,667 Lease financing 519 1,153 182 803 251 ---------- ---------- ---------- ---------- ---------- Total charge-offs 7,921 6,114 6,396 8,699 7,711 ---------- ---------- ---------- ---------- ---------- RECOVERIES: Commercial 1,534 1,390 673 601 431 Real estate(1) 22 4 177 10 41 Consumer installment 2,675 1,510 1,362 1,474 1,464 Lease financing 71 74 88 8 --- ---------- ---------- ---------- ---------- ---------- Total recoveries 4,302 2,978 2,300 2,093 1,936 ---------- ---------- ---------- ---------- ---------- Net charge-offs 3,619 3,136 4,096 6,606 5,775 ---------- ---------- ---------- ---------- ---------- Allowance for loan losses - December 31 $34,771 $24,714 $22,547 $19,404 $19,759 ========== ========== ========== ========== ========== Loans outstanding at year-end $2,428,513 $1,816,221 $1,780,180 $1,557,423 $1,536,461 Average loans outstanding 2,302,414 1,797,153 1,643,327 1,539,332 1,545,108 Ratio of allowance for loan losses to loans outstanding at year-end 1.43% 1.36% 1.27% 1.25% 1.29% Ratio of net loans charged off as a percentage of average loans outstanding 0.16% 0.17% 0.25% 0.43% 0.37%
(1) 1995 and 1994 commercial real estate loan balances and related charge-offs and recoveries are reflected in the commercial loan category. Previous years' balances have not been reclassified. Page 5 35 The Corporation has generally not extended credit to finance highly leveraged transactions nor does it intend to do so in the future. Employment levels and other economic conditions in the Corporation's local markets may have a significant impact on the level of credit losses. Management continues to identify and devote attention to credits that may not be performing as well as expected. Nonperforming loans are further discussed in the section titled "Nonperforming Assets". NONINTEREST INCOME Noninterest income accounted for 20.9% of total operating income or 1.1% of average assets in 1995, decreasing from 22.2% or 1.3%, respectively, in 1994. The decline was primarily the result of discontinuing the Travel Banking product line in early 1995, which provided bankcard merchant fee income. This decrease was more than offset by reductions in associated operating expenses, including interchange and other bankcard expenses. Excluding the effects of the Travel Banking product line and the newly acquired banks, 1995 noninterest income increased by 2.7% over 1994 levels. An analysis of the components of noninterest income is on the following page. Excluding the results of the acquired banks, trust income increased $246,000 or 2.5%. The largest increases occurred in employee benefit trust services. The Corporation offers comprehensive trust services to its customers including investment management services in the personal trust, institutional and employee benefit plan market segments. Deposit service charges increased 12.7% including the results of the newly acquired banks. Brokerage and investment fees decreased $196,000, or 13.8%, excluding the impact of the acquired banks. The decrease in brokerage and investment fees is due to lower market penetration and a temporary reduction in staff during the first half of 1995. Other loan income increased $615,000 from 1994, primarily attributable to premiums on the sale of student loans and loan servicing income from the operations of the acquired banks. Net gains on sale of mortgages were $327,000 in 1995 compared with $255,000 in 1994. The direction and magnitude of changes in market interest rates, as well as the volume of originated mortgages retained, may affect future levels of income for this category. Excluding the acquired banks, other loan income increased $25,900 or 2.0% in 1995 as compared to 1994. ATM fees increased $222,000, or 16.9%, excluding the impact of the acquired banks, due to increased volumes. Increases in cash management services, safe deposit and the other fees resulted primarily from the acquired banks. The Corporation realized net gains on sales of investment securities of $198,000 during 1995 compared with net gains of $157,000 during 1994. As presented in Note 3 to the Consolidated Financial Statements, gross realized gains on sales of investment securities amounted to $202,000 in 1995 while gross realized losses amounted to $4,000. The comparable amounts in 1994 were $326,000 and $169,000, respectively. Proceeds from sales of investment securities during 1995 totaled $7.0 million or 1.2% of total average security holdings compared with $190.3 million or 29.3% in 1994. The 1994 and 1995 net gains resulted from the sale of certain securities to reposition the investment portfolio based on the current rate environment. Effective January 1, 1994, the Corporation adopted Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). This Statement requires the Corporation to classify securities into one of three categories based on its intent and ability to hold the investment to maturity. These categories include: held-to-maturity (securities that the Corporation has the positive intent and ability to hold to maturity), trading (securities bought and held principally for the purpose of selling in the near future) and available-for-sale (securities not classified in either of the two other categories). At adoption, the Corporation classified all of its investment portfolio into the available-for-sale category. Securities classified as available-for-sale are recorded at fair value with unrealized gains or losses reported as a separate component of shareholders' equity. Adoption increased shareholders' equity on January 1, 1994 by $6.6 million. The Corporation's policies with respect to the classification of investments in debt and equity securities are further discussed in the section titled "Investment Securities and Money Market Investments" and in Note 1 to the Consolidated Financial Statements. Page 6 36
- --------------------------------------------------------------------------------------------------- NONINTEREST INCOME Year Ended December 31, Changes in 1995 ---------------------- ------------------- (in thousands) 1995 1994 Amount Percent - --------------------------------------------------------------------------------------------------- Trust fees $11,314 $9,697 $1,617 16.7% Service charges on deposit accounts 9,717 8,618 1,099 12.7 Bankcard fees 5,635 7,694 (2,059) (26.8) Brokerage and investment fees 1,277 1,392 (115) (8.3) Other loan income 1,925 1,310 615 46.9 ATM network user fees 1,665 1,311 354 27.0 Cash management services 1,038 916 122 13.3 Safe deposit rentals 1,012 797 215 27.0 Investment securities gains 198 157 41 26.1 Other 2,653 1,962 691 35.2 ------- ------- ------ Total noninterest income $36,434 $33,854 $2,580 7.6 ======= ======= ======
- --------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Year Ended December 31, Changes in 1995 ---------------------- ------------------- (in thousands) 1995 1994 Amount Percent - --------------------------------------------------------------------------------------------------- Salaries and employee benefits $ 64,357 $ 55,722 $ 8,635 15.5% Equipment 9,709 8,505 1,204 14.2 Occupancy 9,000 8,050 950 11.8 Intangible asset amortization 4,687 1,602 3,085 192.6 FDIC insurance premiums 3,250 5,050 (1,800) (35.6) Bankcard fees 3,418 6,095 (2,677) (43.9) Stationery and supplies 3,570 2,762 808 29.3 Postage and delivery 3,189 2,359 830 35.2 Advertising and public relations 2,386 1,717 669 39.0 Taxes, other than income taxes 2,448 2,519 (71) (2.8) Consulting and other professional fees 1,782 1,632 150 9.2 Legal, audit and examination fees 1,762 1,729 33 1.9 Loan and credit charges 1,860 1,290 570 44.2 Other 9,669 8,213 1,456 17.7 -------- -------- ------- Total noninterest expense $121,087 $107,245 $13,842 12.9 ======== ======== =======
Page 7 37 NONINTEREST EXPENSE The major components of noninterest expense are summarized on the previous page. Excluding the effects of the acquired banks, noninterest expense decreased $4,143,100, or 3.9% in 1995, from 1994 primarily due to a reduction in the FDIC insurance assessments paid by the Corporation's banks for the last seven months of 1995 and the discontinuance of the Travel Banking product line. SALARIES AND BENEFITS Compensation is the Corporation's largest noninterest expense. Excluding the impact of the acquired banks, total compensation expense increased 0.2% to $55,815,000 from $55,722,000 in 1994. This modest increase was primarily due to continued health care benefit cost containment and declines in the number of full-time equivalent employees, offset in part by higher incentive compensation and merit increases. The reduction in staff occurred through normal attrition. The consolidation of various business units and supporting functions throughout the Corporation continues to enhance productivity and mitigate the need to replace staff lost through attrition. In June 1996, the Michigan subsidiaries of the Corporation will collapse their respective charters and subsequently operate as one bank called Citizens Bank. This change will consolidate remaining operational areas and systems and allow for standardization of products and services offered throughout the Corporation's market area. Management anticipates further productivity gains through these operational consolidations and standardization of products and services. OTHER NONINTEREST EXPENSES FDIC insurance assessments decreased by $1,800,000, or 35.6% in 1995 as compared to 1994. The decline resulted from a new rate schedule implemented by the FDIC partially offset by an increase in the Corporation's deposit base due to the purchase of the acquired banks. As a result of the new rate schedule, deposit insurance assessments decreased from 23 cents to 4 cents per $100 of insured deposits for all banks within the Corporation beginning in June 1995. Excluding the impact of the acquired banks, occupancy expense declined $326,000, or 4.0% and equipment expense increased $119,000 or 1.4% compared to the previous year. Intangible asset amortization increased $3,085,000 in 1995 compared with 1994 as a result of the February 28, 1995 acquisition which added $59.2 million to the Corporation's cost-in-excess of the fair value of identifiable net assets acquired. Stationery and supplies, postage and delivery, advertising and public relations and consulting and other professional fee expenses reflect increases related to the ongoing costs associated with the acquired banks as well as one time acquisition and conversion costs. During the second and third quarters of 1995, the Corporation completed all system integration and conversions for the acquired banks to operate within Citizens' corporate systems. This conversion allowed the Corporation to realize cost savings from the consolidated operating systems beginning in the fourth quarter of 1995. Excluding the impact of the acquired banks, bankcard processing expense declined $2,882,000 or 50.3% as compared to 1994, primarily due to the discontinuance of the Travel Banking product line in early 1995 which had previously generated significant amounts of interchange and other bankcard expense. Other loan fees and the "other" component of noninterest expense increased due to expense associated with the acquired banks. FEDERAL INCOME TAXES Income tax expense was $12,805,000 in 1995, an increase of 24.4% over the 1994 total of $10,292,000. The increase was due to higher pre-tax earnings and lower tax-exempt interest income in 1995 as compared to 1994. Page 8 38 BALANCE SHEET Proper management of the volume and composition of the Corporation's earning assets and funding sources is essential for ensuring strong and consistent earnings performance, maintaining adequate liquidity and limiting exposure to risks caused by changing market conditions. The Corporation's investment security portfolio is structured to provide a source of liquidity through maturities and generate an income stream with relatively low levels of principal risk. The Corporation does not engage in active securities trading. Loans comprise the largest component of earning assets and presently are the Corporation's highest yielding assets. Customer deposits are the primary source of funding for earning assets while short-term debt and other managed sources of funds are utilized as market conditions and liquidity needs change. The Corporation's total assets averaged $3.280 billion for 1995, up $569 million from 1994, primarily due to the purchase of the acquired banks at the close of business on February 28, 1995. The ratio of average earning assets to total average assets during 1995 was 91.6%, compared to 92.2% for 1994. The slight decline reflects an increase in intangible asset balances resulting from the acquisition. Average loans and leases comprised 70.2% of total assets during 1995, up from 66.3% in 1994. The ratio of average noninterest-bearing deposits to total deposits remained unchanged from 1994. Interest-bearing deposits comprised 90.0% of total average interest-bearing liabilities during 1995, down from 92.6% in 1994. Average long-term debt increased $94 million to 4.1% of average interest-bearing liabilities as a result of the acquisition. INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS Total investment securities, including money market investments, comprised 23.3% of total average earning assets in 1995, down from 28.1% in 1994. The decrease in investment securities occurred as proceeds from maturities were used to fund loan growth and maintain liquidity. A summary of average investment security balances during 1995 and 1994 follows:
- ---------------------------------------------------------------------------------- INVESTMENT SECURITIES Average Balances(1) Changes in 1995 --------------------- ------------------- Year Ended December 31 (in thousands) 1995 1994 Amount Percent - ---------------------------------------------------------------------------------- U.S. Treasury $206,253 $233,681 $ (27,428) (11.7)% Federal agencies: Mortgage-backed 76,324 94,836 (18,512) (19.5) Other 59,945 49,096 10,849 22.1 State and municipal: Taxable 42,033 53,977 (11,944) (22.1) Tax-exempt 177,392 210,472 (33,080) (15.7) Other 12,201 7,525 4,676 62.1 -------- -------- --------- Total $574,148 $649,587 $ (75,439) (11.6) ======== ======== =========
(1) Average balances reflect the estimated fair value of investment securities Average total investment in U.S. Treasury securities comprised 35.9 % of average total investment securities during 1995, decreasing slightly from 36.0% in 1994. Average Federal agency mortgage-backed securities, primarily collateralized mortgage obligations ("CMO's"), decreased 19.5% in 1995 as proceeds from principal repayments were reinvested in other securities and money market investments and utilized to fund loan growth. The Corporation continues to invest in U.S. Treasury and Federal agency securities which offer increased creditworthiness and liquidity compared with privately issued CMO's. Total state and municipal securities comprised 38.2% of total average investment securities during 1995 compared with 40.7% in 1994. Average tax-exempt state and municipal securities decreased 15.7% from 1994. Purchases of these securities remain dependent on the Corporation's capacity for tax-exempt income. Other securities consisting of Federal Reserve stock, privately issued CMO's and asset backed securities increased 62.1% primarily due to securities acquired as part of the February 28, 1995 acquisition. Page 9 39 Money market investments, primarily federal funds sold and term federal funds sold, averaged $126.2 million in 1995, up 136.0% from $53.5 million in 1994. The amount of funds invested in these assets is based on the present and anticipated interest rate environment, liquidity needs and other economic factors. The Corporation's present policies with respect to the classification of investments in debt and equity securities are discussed in Note 1 to the Consolidated Financial Statements. An analysis of investment securities at year-end for each of the last three years is presented in Table 5. TABLE 5. ANALYSIS OF INVESTMENT SECURITIES
U.S. Treasury and Federal Agency(1) State and Municipal(2) Other(1) Total -------------------------- -------------------------- ------------------------- ------------------------- Amortized Fair Amortized Fair Amortized Fair Amortized Fair (in millions) Cost Value Yield Cost Value Yield Cost Value Yield Cost Value Yield - ---------------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE: MATURITIES AT DECEMBER 31, 1995 DUE WITHIN ONE YEAR $169.4 $186.1 5.47% $44.0 $43.6 6.97% $2.8 $2.9 6.37% $216.2 $232.6 5.78% ONE TO FIVE YEARS 174.8 159.0 5.78 87.2 90.0 8.50 1.0 1.0 7.74 263.0 250.0 6.69 FIVE TO TEN YEARS 1.2 1.2 7.91 45.7 47.0 8.25 0.4 0.4 7.81 47.3 48.6 8.23 AFTER TEN YEARS 0.2 0.2 8.36 32.2 32.9 8.38 6.6 6.6 6.21 39.0 39.7 8.02 ------ ------ ----- ----- ---- ---- ------ ------ TOTAL $345.6 $346.5 5.63 $209.1 $213.5 8.11 $10.8 $10.9 6.45 $565.5 $570.9 6.56 ====== ====== ====== ====== ===== ===== ====== ====== AVERAGE MATURITY 1.39 yrs. 4.31 yrs. 1.76 yrs. 2.94 yrs. At December 31, 1994 Total $346.8 $331.0 5.27% $229.0 $226.4 7.89% $6.5 $6.6 6.67% $582.3 $564.0 6.32% ====== ====== ====== ====== ==== ==== ====== ====== Average maturity 2.00 yrs. 4.34 yrs. 3.53 yrs. 2.94 yrs. Held-to-maturity: At December 31, 1993 Total $361.7 $363.0 4.79% $279.4 $287.8 7.35% $9.2 $9.6 5.52% $650.3 $660.4 5.90% ====== ====== ====== ====== ==== ==== ====== ====== Average maturity 2.32 yrs. 3.48 yrs. 1.60 yrs. 2.81 yrs.
(1) Maturities for FNMA & GNMA mortgage participation securities, collateralized mortgage obligations and asset-backed securities are based upon projections of independent cash flow models. (2) Yields for state and municipal securities are calculated on a tax equivalent basis using a 35% tax rate. As of December 31, 1995, the estimated aggregate fair value of the Corporation's investment securities portfolio was $5.4 million above amortized cost. At December 31, 1995 gross unrealized gains were $6.9 million and gross unrealized losses were $1.5 million. A summary of estimated fair values and unrealized gains and losses for the major components of the investment securities portfolio is provided in Note 3 to the Consolidated Financial Statements. In December 1994, the Corporation adopted Financial Accounting Standards Board Statement No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS 119"). This Statement defines a derivative as a future, forward, swap, option contract or other financial instrument with similar characteristics. The Statement requires expanded disclosures about these types of financial instruments. The Corporation does not invest in derivatives or related types of financial instruments except for Federal agency collateralized mortgage obligations and, therefore, the adoption of this Statement did not have a material effect. The Corporation's policy only allows the purchase of collateralized mortgage obligations that are composed of mortgage backed securities issued by a Federal Agency. Any CMO's purchased are in early tranches with short average lives. These tranches are classified in the Planned Amortization Class and have well-defined prepayment assumptions (Super PAC's). The Corporation's CMO's are periodically tested to ensure compliance with guidelines established by the Federal Financial Institutions Examination Council. LOANS AND LEASES The Corporation extends credit primarily within the local markets of its seven bank subsidiaries. These natural geographic concentrations extend along the Interstate 75 corridor within the State of Michigan from northern suburban Detroit to the greater Grayling/Gaylord area, as well as the western suburban market of Chicago, Illinois. During 1995, the Corporation expanded its market presence Page 10 40 with the purchase of the acquired banks. These new locations in East Lansing, Fenton, Sturgis and Ypsilanti give the Corporation opportunities within the western suburban Detroit, central and southwestern Michigan market areas. The Corporation's loan portfolio is widely diversified by borrowers with no concentration within a single industry that exceeds 10% of total loans. The Corporation's loan portfolio balances are summarized in Table 6. Total average loans and leases comprised 76.7% of total average earning assets during 1995 compared with 71.9% during 1994. As the economy continued to expand in 1995, the Corporation experienced greater loan demand with total average loans increasing 28.1% (3.0% excluding the acquired banks). This growth occurred in all major loan categories except the lease financing portfolio. The majority of loan growth occurred as a result of the February 28, 1995 acquisition. Consumer installment loans represent the most significant component of the acquired banks' loan portfolio. Increased demand for business loans in the Corporation's local markets and improved economic conditions modestly expanded the commercial and commercial real estate loan portfolio 19.3% (3.4% excluding the acquired banks) in 1995 from 1994 levels. Average consumer loan balances increased to $900.1 million in 1995 from $569.4 million, or 58.1% (7.0% excluding the acquired banks). Average mortgage loan balances increased $46.4 million or 11.9% in 1995, from $389.7 million in 1994 (1.9% excluding the acquired banks). In May 1995, Financial Accounting Standards Board issued Statement No. 122 "Accounting for Mortgage Servicing Rights". The Statement amends FASB Statement No. 65 to require mortgage banking related companies to recognize as a separate asset the rights to service mortgage loans for others regardless of how those servicing rights are acquired. This may be through purchase or origination of the mortgage loans. The Statement is effective for years beginning after December 15, 1995. The Corporation will adopt the Statement January 1, 1996. The impact of adoption on the Corporation is not expected to be material. TABLE 6. LOAN PORTFOLIO
1995 1994 1993 1992 1991 ---------------- ---------------- ---------------- ---------------- ---------------- December 31 (in millions) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent - -------------------------------------------------------------------------------------------------------------------------- Commercial $566.9 23.3% $461.9 25.4% $426.9 24.0% $398.7 25.6% $404.4 26.4% Commercial real estate 339.0 14.0 286.4 15.8 286.6 16.1 247.3 15.9 260.4 16.9 Real estate-construction 34.0 1.4 24.9 1.4 38.3 2.2 23.4 1.5 13.7 0.9 Real estate-mortgage 457.8 18.9 384.4 21.2 398.1 22.3 336.8 21.6 353.3 23.0 Consumer installment 970.7 40.0 581.3 32.0 534.7 30.0 471.4 30.3 457.2 29.7 Lease financing 60.1 2.4 77.3 4.3 95.6 5.4 79.8 5.1 47.5 3.1 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total $2,428.5 100.0% $1,816.2 100.0% $1,780.2 100.0% $1,557.4 100.0% $1,536.5 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
NONPERFORMING ASSETS A five year history of nonperforming assets is presented in Table 7. Total nonperforming assets, comprised of nonaccrual loans, loans 90 days past due and still accruing, restructured loans and other real estate, amounted to $21.1 million as of December 31, 1995, a decrease of 3.7% from the year-end 1994 total of $21.9 million. Nonperforming loans as a percentage of total loans declined significantly to 0.81% at December 31, 1995 from 1.09% on December 31, 1995, a decrease of 25.7%. The decline resulted from the Corporation's continued management of loan portfolio quality and favorable economic conditions. In addition, during 1995 consumer installment loan balances (which historically contain lower levels of nonperforming loans) grew at a faster rate than other segments of the portfolio, reflecting the retail orientation of the acquired banks. The consumer installment portfolio is composed of automobile, personal, marine, home equity and bankcard loans of which automobile and home equity comprise 66.7% of the 1995 average balances. One to four family residential home loans comprise the majority of the real estate mortgage balances. The Corporation's commercial real estate portfolio represents 14.0% of total loans at December 31, 1995 compared to 15.8% at year end 1994. Within this portfolio, nonperforming loans represented 16.4% of total nonperforming loans at December 31, 1995 compared with 18.7% at December 31, 1994. Management believes the risk of loss on such nonaccrual loans is significantly less than the total principal balance, due to the nature of the underlying collateral. These loans are generally for owner-occupied properties and do not rely on the performance of the real estate market to generate funds for repayment. The Corporation maintains formal policies and procedures to control and monitor credit risk within these portfolios. Based upon present information, management believes the allowance for loan losses is adequate to meet presently known credit risks. Page 11 41 TABLE 7. NONPERFORMING ASSETS AND PAST DUE LOANS
December 31 (in thousands) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------------------- NONPERFORMING LOANS(1),(2) Nonaccrual(3) Less than 30 days past due $ 4,783 $ 5,185 $ 2,518 $ 3,247 $ 1,696 From 30 to 89 days past due 784 1,405 938 1,781 2,168 90 or more days past due 13,057 11,566 17,815 15,731 20,846 ------- -------- -------- -------- -------- Total 18,624 18,156 21,271 20,759 24,710 90 days past due and still accruing(5) 432 1,253 155 1,206 1,196 Restructured(1) 494 299 238 382 547 ------- -------- -------- -------- -------- Total nonperforming loans 19,550 19,708 21,664 22,347 26,453 OTHER REAL ESTATE(3) 1,568 2,230 2,185 4,333 4,214 ------- -------- -------- -------- -------- Total nonperforming assets $21,118 $21,938 $23,849 $26,680 $30,667 ======= ======== ======== ======== ======== Nonperforming loans as a percent of total loans 0.81% 1.09% 1.22% 1.44% 1.72% Nonperforming assets as a percent of total loans plus other real estate 0.87 1.21 1.34 1.71 1.99 NONPERFORMING LOANS BY TYPE Commercial $13,059 $15,741 $13,034 $10,874 $11,831 Real estate(3)(4) 2,543 1,224 5,232 8,940 12,149 Consumer installment 2,600 1,174 1,574 1,503 1,981 Lease financing 1,348 1,569 1,824 1,030 492 ------- -------- -------- -------- -------- Total $19,550 $19,708 $21,664 $22,347 $26,453 ======= ======== ======== ======== ========
(1) Nonperforming loans include loans on which interest is being recognized only upon receipt (nonaccrual), those on which interest has been renegotiated to lower than market rates because of the financial condition of the borrowers (restructured), and loans 90 days past due and still accruing. (2) Gross interest income that would have been recorded in 1995 for nonaccrual and restructured loans, as of December 31, 1995, assuming interest had been accrued throughout the year in accordance with original terms was $2.509 million. The comparable 1994 and 1993 totals were $1.879 million, and $1.589 million, respectively. Interest collected on these loans and included in income was $1.427 million in 1995, $1.128 million in 1994 and $0.697 million in 1993. Therefore, on a net basis, total income foregone due to these loans was $1.082 million in 1995, $0.751 million in 1994 and $0.892 million in 1993. (3) Assets in-substance foreclosed previously reported as other real estate were reclassified as nonaccrual loans in the fourth quarter of 1993. Assets in-substance foreclosed totaled $0 at December 31, 1995; $0.021 million at December 31, 1994; $1.720 million at December 31, 1993; $2.983 million at December 31, 1992 and $4.302 million at December 31, 1991. (4) 1995 and 1994 nonperforming commercial real estate loan balances have been reclassified into the nonperforming commercial loan category. Previous years' balances have not been reclassified. (5) In 1995, loans 90 days past due and still accruing were reclassified as nonperforming loans. All prior year information was restated. The Corporation changed its nonperforming asset policy in the third quarter of 1995 to include loans 90 days past due and still accruing in the nonperforming asset category. Previously these loans were considered underperforming assets. All nonperforming asset disclosures have been adjusted to reflect this change. The change did not materially impact the percentage of nonperforming loans to total loans. The level and composition of nonperforming assets are affected by economic conditions in the Corporation's local markets. Nonperforming assets, charge-offs and provisions for loan losses tend to decline in a strong economy and increase in a weak economy, potentially impacting the Corporation's results. In addition to nonperforming loans, management carefully monitors other credits that are current in terms of principal and interest payments but, in management's opinion, may deteriorate in quality if economic conditions change. As of December 31, 1995, such loans amounted to $10.8 million or 0.5% of total loans compared with $15.3 million or 0.8% of total loans as of December 31, 1994. These loans are primarily commercial and commercial real estate loans made in the normal course of business and do not represent a concentration in any one industry. Collectively, these loans and the nonperforming assets in Table 7 represent 1.32% of total loans as of December 31, 1995 compared with 2.0% as of December 31, 1994. Page 12 42 TABLE 8. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Amount Allocated by Loan Category -------------------------------------------------- December 31 (in millions) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------- Commercial $11.2 $10.6 $6.0 $6.9 $7.9 Real estate-construction 0.1 0.1 0.2 0.1 0.2 Real estate-mortgage(1) 1.1 1.0 3.2 3.2 3.0 Consumer installment 13.2 7.0 6.6 5.7 5.2 Lease financing 1.2 1.2 1.1 1.0 0.4 ----- ----- ----- ----- ----- Total allocated 26.8 19.9 17.1 16.9 16.7 Unallocated 8.0 4.8 5.4 2.5 3.1 ----- ----- ----- ----- ----- Total $34.8 $24.7 $22.5 $19.4 $19.8 ===== ===== ===== ===== =====
The allocations of the allowance for loan losses in the above table are based upon ranges of estimates and are not intended to imply either limitations on the usage of the allowance or precision of the specific amounts. The Corporation and its subsidiaries do not view the allowance for loan losses as being divisible among the various categories of loans. The entire allowance is available to absorb any future losses without regard to the category or categories in which the charged-off loans are classified. (1) 1995 and 1994 commercial real estate loan allowance allocations are reflected in the commercial loan category. Prior years' allowance allocations have not been reclassified. The Corporation adopted Financial Accounting Standards Board Statement ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures" effective January 1, 1995. SFAS 114 requires creditors to establish a valuation allowance for impaired loans. A loan is considered impaired when management determines it is probable that all the principal and interest due under the contractual terms of the loan will not be collected. The impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. The adoption of the Statements did not have a material effect on the Corporation's financial position or results of operations, nor did it result in additional provisions for loan losses as the Corporation has historically established valuation allowances based on the fair value of collateral securing an impaired loan. In addition, as permitted by SFAS 118, interest income on impaired loans continues to be recognized in a manner consistent with prior income recognition policies. For all impaired loans, other than nonaccrual loans, interest income is recorded on an accrual basis. Interest income on impaired nonaccrual loans is recognized on a cash basis. Certain of the Corporation's nonperforming loans included in Table 7 are considered to be impaired under the Statements. The Corporation measures impairment on all large balance nonaccrual commercial and commercial real estate loans. Certain large balance accruing loans rated substandard or worse are also measured for impairment. In most instances, impairment is measured based on the fair value of the underlying collateral. Impairment losses are included in the provision for loan losses. SFAS 114 does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring. Loans collectively evaluated for impairment include certain smaller balance commercial loans, consumer loans, residential real estate loans, and credit card loans, and are not included in the impaired loan data in the following paragraph. At December 31, 1995, loans considered to be impaired under the Statements totaled $16.6 million (of which $10.1 million were on a nonaccrual basis). Included within this amount is $4.7 million of impaired loans for which the related allowance for loan losses is $0.8 million and $11.9 million of impaired loans for which the fair value exceeded the recorded investment in the loan. The average recorded investment in impaired loans during the year ended December 31, 1995 was approximately $19.9 million. For the year ended December 31, 1995, the Corporation recognized interest income of $1.5 million which included $0.8 million of interest income recognized using the cash basis method of income recognition. The Corporation maintains policies and procedures to identify and monitor nonaccrual loans. A loan (including a loan impaired under the Statements) is placed on nonaccrual status when there is doubt regarding collection of principal or interest, or when principal or interest is past due 90 days or more and the loan is not well secured and in the process of collection. Interest accrued but not collected is reversed and charged against income when the loan is placed on nonaccrual status. Other real estate owned is comprised of property acquired through a foreclosure proceeding or acceptance of Page 13 43 a deed-in-lieu of foreclosure and loans classified as in-substance foreclosure. In accordance with the Statements, a loan is classified as in-substance foreclosure when the Corporation has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. Loans previously classified as in-substance foreclosure but for which the Corporation has not taken possession of the collateral are classified in loans. Therefore, these Statements had no effect in 1995 since the Corporation's policy on in-substance foreclosed assets had been previously amended in 1993 to comply with new regulatory guidelines. During 1995, each of the Corporation's banking subsidiaries received a normally scheduled examination by its governing regulatory agency. There was no material reclassification of assets as nonperforming resulting from these examinations. TABLE 9. AVERAGE DEPOSITS
1995 1994 1993 ------------------ ----------------- ----------------- AVERAGE AVERAGE Average Average Average Average Year Ended December 31 (in millions) BALANCE RATE Balance Rate Balance Rate - ---------------------------------------------------------------------------------------------------- Noninterest-bearing demand $451.6 --- $379.7 --- $325.6 --- Interest-bearing demand 309.4 1.87% 256.1 1.71% 238.5 2.08% Savings 909.7 2.82 909.4 2.39 832.4 2.56 Time 1,031.6 5.50 717.0 4.17 712.8 4.35 -------- -------- -------- Total $2,702.3 3.26 $2,262.2 2.48 $2,109.3 2.72 ======== ======== ========
DEPOSITS The Corporation's average deposit balances and rates for the past three years are summarized in Table 9. Total average deposits were 19.5% higher in 1995 compared with 1994, due to the acquired banks. The Corporation experienced increases in all deposit categories. As a result of customer preferences, deposits continued shifting from savings to time deposits during 1995, with savings balances remaining virtually unchanged despite the effect of the acquired banks. Noninterest-bearing demand accounts accounted for 16.7% of total average deposits during 1995, unchanged from 1994. As of December 31, 1995, certificates of deposits of $100,000 or more comprised approximately 7.6% of total deposits compared with 5.0% as of December 31, 1994. The maturities of these deposits are summarized in Table 10. TABLE 10. MATURITY OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
December 31, (in millions) 1995 - ------------------------------------------------------------ Three months or less $102.4 After three but within six months 49.5 After six but within twelve months 42.2 After twelve months 25.1 ------ Total $219.2 ======
The Corporation gathers deposits primarily from the local markets of its banking subsidiaries and does not rely on brokered deposits. Management continues to promote core deposit growth and stability through focused marketing efforts and competitive pricing strategies. BORROWED FUNDS Total short-term borrowings, primarily federal funds purchased, securities sold under agreements to repurchase and Treasury Tax and Loan notes, averaged $146.0 million or 5.8% of total average interest-bearing liabilities during 1995 compared with $141.2 million or 6.9% during 1994. Long-term debt accounted for $102.8 million or 4.1% of average interest-bearing funds during 1995, increasing from $8.7 million or 0.4% in 1994. To finance the acquisition of the acquired banks, the Corporation's Parent company obtained a $115 million seven year amortizing revolving credit facility. $75 million of the revolving credit facility is currently priced at a fixed rate of 7.65%. Of this amount, $16.5 million reprices in March 1996, $51.5 million in March 1997 and $7 million in March 1998. The remaining $23.5 million outstanding has an interest rate based on a LIBOR index. The debt agreement allows the Corporation to prepay the debt without penalty subject to certain restrictions. The Parent company services the debt's principal and interest payments with dividends from the subsidiary banks. The agreement also requires the Corporation to maintain certain financial covenants. The Corporation is in full compliance with all debt covenants as of December 31, 1995. In addition, $4.6 million of long-term debt of the acquired banks was assumed by the Corporation as part of the acquisition. A summary of long-term debt balances as of December 31, 1995 and 1994 appears in Note 9 to the Consolidated Financial Statements. Page 14 44 CAPITAL RESOURCES Management closely monitors capital levels to provide for current and future business needs and to comply with regulatory requirements. All bank subsidiaries within the Corporation have sufficient capital to maintain a "well capitalized" designation, (the FDIC's highest rating). As summarized below, the Corporation's capital ratios were in excess of regulatory requirements.
- -------------------------------------------------------------- Regulatory Minimum ---------------------- December 31, "Well ------------------- Required Capitalized" 1995 1994 1993 - -------------------------------------------------------------- Risk based: Tier I capital 4.00% 6.00% 8.79% 13.44% 13.12% Total capital 8.00 10.00 10.04 14.69 14.36 Tier I leverage 3.00 5.00 6.65 9.52 8.90
The Corporation declared cash dividends of $0.90 per share in 1995, an increase of 9.8% over 1994 dividends of $0.82 per share. Citizens Banking Corporation or its predecessor, Citizens Commercial & Savings Bank, have paid dividends every year since 1892 except for several years during the depression of the 1930's. The Corporation maintains a stock repurchase program initiated in November 1987. During 1995, no shares were purchased under this program. A total of 1,132,470 shares have been purchased under this program at an average price of $14.31 per share. LIQUIDITY AND DEBT CAPACITY The liquidity position of the Corporation is monitored for each subsidiary and the Parent company to ensure that funds are available at a reasonable cost to meet financial commitments and to finance business expansion. The Corporation's subsidiary banks derive liquidity primarily through core deposit growth and maturity of money market investments, investment securities and loans. Additionally, the Corporation's subsidiary banks have access to market borrowing sources on an unsecured, as well as a collateralized basis, for short-term purposes. Management has not had to rely on borrowings from the Federal Reserve or the sale of investment securities to meet liquidity requirements. Another source of liquidity is the ability of the Corporation's Parent company to borrow funds on both a short-term and long-term basis. Various techniques are used by the Corporation to measure liquidity, including ratio analysis. Some ratios monitored by the Corporation include: loans to deposits; short-term investments to volatile liabilities (including short-term debt and large denomination certificates of deposit); and liquid assets (cash, U.S. Treasury securities and short-term investments) to total deposits. The ratios are summarized below for the last three years.
- -------------------------------------------------------------- December 31 1995 1994 1993 - -------------------------------------------------------------- Average loans to deposits 85.2% 80.0% 78.0% Short-term investments to volatile liabilities 41.0 40.7 33.7 Liquid assets to total deposits 18.2 19.7 18.6
The subsidiary banks manage liquidity to meet customer cash flow needs while maintaining funds available for investment opportunities. As discussed in Note 16 to the Consolidated Financial Statements, the Federal Reserve Bank requires the Corporation's banking subsidiaries to maintain certain noninterest-bearing deposits. The balances averaged $41.2 million and $36.2 million during 1995 and 1994, respectively. The liquidity of the Parent company is managed to provide funds to pay dividends to shareholders, service debt, invest in subsidiaries and to satisfy other operating requirements. The Parent company's primary source of liquidity is dividends from its subsidiaries. During 1995, the Parent company received $24.4 million in dividends from subsidiaries and paid $12.8 million in dividends to its shareholders. As discussed in Note 16 to the Consolidated Financial Statements, $23.2 million was available as of January 1, 1996 for payment to the Parent company as dividends by the Corporation's banking subsidiaries without further regulatory approval. Amounts earned by subsidiaries in 1996 may also become available for such dividend payments. Additional amounts may be available for payment subject to regulatory approval. On October 20, 1995, the Corporation announced the consolidation of its six Michigan chartered banks into one bank called Citizens Bank. The consolidation will further streamline operations and reduce certain costs but will retain local management and respective boards of directors. The consolidation is subject to regulatory approval and is expected to be completed in June 1996. This consolidation will likely result in maintaining additional non-interest bearing deposits with the Federal Reserve Bank and may favorably impact the ability of the surviving entity to pay dividends to the Parent company without further regulatory approval. The Corporation's long-term debt to equity ratio was 35.5% as of December 31, 1995 compared with 2.0% as of December 31, 1994. Increases in long-term debt during 1995 are discussed in the section titled "Borrowed Funds". Management believes that the Corporation has sufficient liquidity to meet presently known cash flow requirements arising from ongoing business transactions. Page 15 45 INTEREST RATE RISK Interest rate risk generally arises when the maturity or repricing structure of the Corporation's assets and liabilities differs significantly. Asset/liability management, which among other things addresses such risk, is the process of developing, testing and implementing strategies that seek to maximize net interest income, maintain sufficient liquidity and minimize exposure to significant changes in interest rates. This process includes monitoring contractual and expected repricing of assets and liabilities as well as forecasting earnings under different interest rate scenarios and balance sheet structures. Generally, management seeks a structure that insulates net interest income from large swings attributable to changes in market interest rates. Table 11 depicts the Corporation's asset/liability static sensitivity ("GAP") as of December 31, 1995. TABLE 11. INTEREST RATE SENSITIVITY
TOTAL December 31, 1995 1-30 31-90 91-180 181-365 WITHIN 1-5 Over (in millions) Days Days Days Days 1 YEAR Years 5 Years Total - ----------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS Loans and leases $755.8 $95.0 $153.2 $236.0 $1,240.0 $848.8 $339.7 $2,428.5 Investment securities 13.9 60.7 77.2 80.8 232.6 250.0 88.3 570.9 Short-term investments 104.8 45.0 --- --- 149.8 --- --- 149.8 ------ ------ ------ ------ -------- -------- ------ -------- Total $874.5 $200.7 $230.4 $316.8 $1,622.4 $1,098.8 $428.0 $3,149.2 ====== ====== ====== ====== ======== ======== ====== ======== RATE SENSITIVE LIABILITIES Deposits (2) $170.6 $236.5 $301.8 $521.3 $1,230.2 $982.5 $145.8 $2,358.6 Short-term borrowings 146.0 --- --- --- 146.0 --- --- 146.0 Long-term debt 2.5 20.0 20.1 --- 42.6 58.5 4.4 105.4 ------ ------ ------ ------ -------- -------- ------ -------- Total $319.1 $256.5 $321.9 $521.3 $1,418.8 $1,041.0 $150.2 $2,610.0 ====== ====== ====== ====== ======== ======== ====== ======== Period GAP (1) $555.4 $(55.8) $(91.5) $(204.5) $203.6 $57.8 $277.8 $539.2 Cumulative GAP 555.4 499.6 408.1 203.6 261.4 539.2 Cumulative GAP to Total Assets 16.03% 14.42% 11.78% 5.88% 5.88% 7.55% 15.57% 15.57% Multiple of Rate Senitive Assets to Liabilities 2.74 0.78 0.72 0.61 1.14 1.06 2.85 1.21
(1) GAP is the excess of rate sensitive assets (liabilities). (2) Includes interest bearing savings and demand deposits of $394 million in the less than one year category and $832 million in the over one year category. This runoff is based on historical trends, which reflects industry standards. As shown, the Corporation had an asset sensitive position (more rate sensitive assets than rate sensitive liabilities) of $203.6 million within the one-year time frame. This position suggests that the Corporation has the potential to earn higher net interest income during the next twelve months if market interest rates were to rise. Conversely, if interest rates continue to decline, the Corporation may experience a decrease in net interest income. However, management is continually reviewing its interest rate risk position and modifying its strategies based on projections to minimize the impact of future interest rate declines. Traditional GAP analysis does not, however, incorporate adjustments for the magnitude or timing of noncontractual repricing. Because of these and other inherent limitations of GAP analysis, management also utilizes simulation modeling to evaluate the impact of changes in interest rates and balance sheet strategies. Management uses these simulations to develop strategies that can limit interest rate risk and provide liquidity to meet customer loan demand and deposit preferences. Page 16 46 TABLE 12. LOAN MATURITIES AND INTEREST RATE SENSITIVITY
Due Within One to After December 31 (in millions) One Year Five Years Five Years Total - ------------------------------------------------------------------------------------------------------------------------------------ Commercial $453.8 $395.0 $57.1 $905.9 Real estate-construction 24.4 9.3 0.3 34.0 ------ ------ ----- ------ Total $478.2 $404.3 $57.4 $939.9 ====== ====== ===== ====== Loans above: With floating interest rates $330.8 $181.8 $38.4 $551.0 With predetermined interest rates 147.4 222.5 19.0 388.9 ------ ------ ----- ------ Total $478.2 $404.3 $57.4 $939.9 ====== ====== ===== ======
TABLE 13. SELECTED QUARTERLY INFORMATION
1995 1994 ------------------------------------------- ------------------------------------------- (in thousands except per share data) FOURTH THIRD SECOND FIRST Fourth Third Second First ------- ----- ------ ----- -------- ------ ------- ---------- Interest income $63,752 $62,779 $62,248 $51,821 $46,836 $45,849 $44,529 $42,775 Net interest income 35,536 35,045 35,361 31,553 30,531 30,315 29,559 27,995 Provision for loan losses 1,937 1,504 1,580 1,420 1,532 1,355 1,358 1,058 Investment securities gains (losses) 79 15 13 91 4 (35) 9 179 Noninterest income 9,790 9,586 8,889 7,971 8,564 8,450 8,369 8,314 Noninterest expense 29,952 30,587 32,468 28,080 26,328 26,759 26,701 27,457 Net income 9,759 8,984 7,469 7,384 8,234 7,745 7,226 6,209 PER SHARE OF COMMON STOCK Net income: Primary 0.67 0.62 0.51 0.51 0.56 0.54 0.50 0.43 Fully diluted 0.67 0.61 0.51 0.51 0.56 0.54 0.50 0.43 Cash dividends declared 0.23 0.23 0.23 0.21 0.21 0.21 0.21 0.19 Market value:(1) High 32.50 33.25 31.00 27.00 29.00 26.75 26.00 26.00 Low 29.00 29.25 25.25 24.94 25.25 22.00 22.75 22.75 Close 29.75 30.38 29.75 26.50 27.75 25.50 24.50 22.75
(1) Citizens Banking Corporation common stock is traded in the over-the-counter market (NASDAQ trading symbol: CBCF). At December 31, 1995, there were approximately 6,700 shareholders of the Corporation's common stock. IMPACT OF INFLATION Substantially all of the assets and liabilities of a financial institution are monetary. Therefore, inflation generally has a less significant impact on financial institutions than fluctuations in market interest rates. Inflation can lead to accelerated growth in noninterest expenses, which can adversely impact results of operations. Additionally, inflation may impact the rate of deposit growth and necessitate increased growth in equity to maintain a strong capital position. Management believes the most significant impact on financial results is the Corporation's ability to respond to changes in interest rates. Page 17 47 YEAR ENDED DECEMBER 31, 1994 COMPARED WITH 1993 Citizens Banking Corporation earned $29,414,000 or $2.03 per fully diluted share during 1994 compared with $25,770,000 or $1.88 per share in 1993. 1994 reflected a 14.1% increase in net income as compared with 1993. Return on assets improved 6.9% from 1.02% in 1993 to 1.09% in 1994. Overall, the increase in net income in 1994 reflects improvement in net interest income, noninterest income and a reduction in the provision for loan losses offset, in part, by increases in noninterest expense and income taxes. The October 1, 1993 acquisition of National Bank of Royal Oak ("NBRO") by the Corporation affects the comparison between 1994 and 1993. The acquisition was accounted for as a purchase and, accordingly, the Corporation's net income reflects three months of financial results for 1993 and a full year for 1994. Net interest income for 1994 was $118,400,000, an increase of 13.5% over 1993 net interest income of $104,334,000. This increase resulted from a higher level of earning assets, primarily due to the acquisition of NBRO. Yields on assets increased slightly between 1994 and 1993. However, rates paid on funding sources continued to decline in 1994. As a result, the net interest margin increased to 4.99% in 1994, a 25 basis point improvement over 1993. The provision for loan losses decreased to $5,303,000 in 1994 compared with $5,597,000 in 1993 as a result of lower net loan charge-offs and improved economic conditions. Net loan charge-offs were 0.17% of average total loans in 1994, down from 0.25% in 1993. As of December 31, 1994, the ratio of the allowance for loan losses to net charge-offs improved to 7.9 times compared with 5.5 times as of December 31, 1993. Noninterest income in 1994 increased $2,639,000 or 8.5% over the 1993 levels. This increase resulted from the NBRO acquisition and higher trust fee income and bankcard fee income. 1994 results for NBRO reflect $3,623,000 of noninterest income for merchant discount and other bankcard fee income primarily from the Travel Banking product line. Other loan income declined $345,000 in 1994 compared with 1993, the result of lower gains on the sale of mortgage loans into the secondary market and lower mortgage servicing fees. The Corporation also realized net gains on the sale of securities of $157,000 during 1994 compared with $763,000 in 1993. Noninterest expense was up $9,977,000 or 10.3% in 1994 of which $9,205,000 resulted from the acquisition of NBRO. Compensation expense, excluding NBRO decreased 0.4% in 1994 compared with 1993. This decline was primarily due to continued health care cost containment and a reduction in the number of full-time equivalent employees through normal attrition. Excluding NBRO, consulting fees increased 12.3% in 1994 compared with 1993 due to Corporate automation and reengineering project costs. Excluding the results of NBRO, bankcard interchange fees increased because of higher merchant transaction levels. Interchange and other bankcard fees for NBRO totaled $3,797,000 in 1994 versus $911,000 in 1993. These fees primarily reflect the Travel Banking product line transactions. In 1994 NBRO also incurred a one-time charge of $1,500,000 related to the Travel Banking product line. Subsequent to 1994, this product line was discontinued. Income tax expense for 1994 increased 48.9% compared with 1993. This increase resulted from higher pretax earnings combined with lower tax-exempt interest income. The adoption of Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" by the Corporation effective January 1, 1993 had no material effect on the results of operations or financial position of the Corporation. The Corporation had total average assets of $2.711 billion in 1994, up from 1993 average assets of $2.535 billion, primarily due to the acquisition of NBRO. Average loans and leases comprised 71.9% of total earning assets in 1994, up from 70.0% in 1993. Much of this growth occurred in the consumer and commercial loan portfolios due to improved economic conditions and the acquisition of NBRO. Average money market investment balances, primarily federal funds sold and Eurodollar time deposits were virtually unchanged from 1993 levels. As discussed in Note 1 to the Consolidated Financial Statements, the Corporation adopted SFAS 115 and classified all of its investment portfolio in the available-for-sale category as of January 1, 1994. Total average deposits were 7.2% higher in 1994 compared with 1993, primarily due to the acquisition of NBRO. The Corporation experienced increases in all deposit categories. As a result of customer preferences, deposit balances continued to shift from time to savings and demand accounts in 1994 as noted by average time deposits remaining nearly unchanged despite the NBRO acquisition. Average short-term borrowings, comprised primarily of securities sold under agreements to repurchase, decreased slightly to 6.9% of average interest-bearing liabilities in 1994 compared with 7.1% in 1993. Average long-term debt balances declined to $8.7 million in 1994 from $13.1 million in 1993 due to scheduled principal payments. Average shareholders' equity was $256.6 million at December 31, 1994, an 11.0% increase over the 1993 average of $231.2 million. Page 18 48 CONSOLIDATED BALANCE SHEETS CITIZENS BANKING CORPORATION AND SUBSIDIARIES
December 31, (in thousands except share amounts) 1995 1994 - ------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 172,754 $ 132,092 Money market investments: Interest-bearing deposits with banks 10,090 20,135 Federal funds sold 50,000 60,000 Term federal funds sold and other 89,744 25,000 ----------- --------- Total money market investments 149,834 105,135 Investment securities available-for-sale (amortized cost $565,547 in 1995; $582,316 in 1994) 570,912 563,999 Loans: Commercial loans 905,947 748,318 Real estate - construction 33,984 24,947 Real estate - mortgage 457,758 384,401 Consumer installment 970,755 581,252 Lease financing 60,069 77,303 ----------- ---------- Total loans 2,428,513 1,816,221 Less: Allowance for loan losses (34,771) (24,714) ----------- ---------- Net loans 2,393,742 1,791,507 Premises and equipment 63,147 52,533 Intangible assets 70,385 15,830 Other assets 43,148 42,727 ----------- ---------- TOTAL ASSETS $3,463,922 $2,703,823 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits $ 506,116 $ 416,395 Interest-bearing deposits 2,358,585 1,835,923 ---------- ---------- Total deposits 2,864,701 2,252,318 Federal funds purchased and securities sold under agreements to repurchase 130,556 125,581 Other short-term borrowings 15,468 20,850 Other liabilities 50,600 41,095 Long-term debt 105,411 5,249 ---------- ---------- Total liabilities 3,166,736 2,445,093 SHAREHOLDERS' EQUITY Preferred stock - no par value: Authorized - 5,000,000 shares Issued - none --- --- Common stock - no par value: Authorized - 40,000,000 shares Issued and outstanding - 14,333,920 in 1995; 14,128,368 in 1994 91,480 89,243 Retained earnings 202,219 181,393 Net unrealized gain (loss) on securities available-for-sale, 3,487 (11,906) netof tax ---------- ---------- Total shareholders' equity 297,186 258,730 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,463,922 $2,703,823 ========== ==========
See Notes to Consolidated Financial Statements. Page 19 49 CONSOLIDATED STATEMENTS OF INCOME CITIZENS BANKING CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, (in thousands except share amounts) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $201,242 $144,263 $133,029 Interest and dividends on investment securities: Taxable 22,531 22,725 19,555 Nontaxable 9,403 10,568 11,731 Money market investments 7,424 2,433 2,137 ---------- ---------- ---------- Total interest income 240,600 179,989 166,452 ---------- ---------- ---------- INTEREST EXPENSE Deposits 88,157 56,020 57,294 Short-term borrowings 7,221 5,115 4,203 Long-term debt 7,727 454 621 ---------- ---------- ---------- Total interest expense 103,105 61,589 62,118 ---------- ---------- ---------- NET INTEREST INCOME 137,495 118,400 104,334 Provision for loan losses 6,441 5,303 5,597 ---------- ---------- ---------- Net interest income after provision for loan losses 131,054 113,097 98,737 ---------- ---------- ---------- NONINTEREST INCOME Trust fees 11,314 9,697 9,162 Service charges on deposit accounts 9,717 8,619 7,934 Bankcard fees 5,635 7,694 4,631 Investment securities gains 198 157 763 Other 9,570 7,687 8,725 ---------- ---------- ---------- Total noninterest income 36,434 33,854 31,215 ---------- ---------- ---------- NONINTEREST EXPENSE Salaries and employee benefits 64,357 55,722 53,177 Equipment 9,709 8,505 7,616 Occupancy 9,000 8,050 7,073 FDIC insurance premiums 3,250 5,050 4,714 Bankcard fees 3,418 6,095 2,847 Stationery and supplies 3,570 2,762 2,527 Postage and delivery 3,189 2,359 2,279 Other 24,594 18,702 17,035 ---------- ---------- ---------- Total noninterest expense 121,087 107,245 97,268 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 46,401 39,706 32,684 Income taxes 12,805 10,292 6,914 ---------- ---------- ---------- NET INCOME $33,596 $29,414 $25,770 ========== ========== ========== Net Income Per Share: Primary $2.31 $2.03 $1.88 Fully diluted $2.30 $2.03 $1.87 Average shares outstanding: Primary 14,574,871 14,463,068 13,724,319 Fully diluted 14,611,736 14,511,706 13,789,302
See Notes to Consolidated Financial Statements. Page 20 50 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Retained Unrealized (in thousands except share amounts) Common Stock Earnings Gain(Loss) Total - ---------------------------------------------------------------------------------------------------------- BALANCE - JANUARY 1, 1993 $71,573 $147,703 $ --- $219,276 Net income 25,770 25,770 Exercise of stock options, net of shares purchased 828 828 Cash dividends-$0.745 per share (9,937) (9,937) Shares acquired for retirement (3,254) (3,254) Acquisition of subsidiary bank (1,073,053 shares issued) 22,480 22,480 ------- -------- ------- -------- BALANCE - DECEMBER 31, 1993 91,627 163,536 --- 255,163 Net income 29,414 29,414 Exercise of stock options, net of shares purchased 1,602 1,602 Cash dividends-$0.820 per share (11,557) (11,557) Shares acquired for retirement (3,986) (3,986) Effect on January 1, 1994 of change in accounting for investment securities, net of deferred tax of $3,544 6,582 6,582 Net unrealized loss on securities available-for-sale,net of tax effect of $9,955 (18,488) (18,488) ------- -------- ------- -------- BALANCE - DECEMBER 31, 1994 89,243 181,393 (11,906) 258,730 Net income 33,596 33,596 Exercise of stock options, net of shares purchased 2,237 2,237 Cash dividends-$0.900 per share (12,770) (12,770) Net unrealized gain on securities available-for-sale, net of tax effect of $8,289 15,393 5,393 ------- -------- ------- -------- BALANCE - DECEMBER 31, 1995 $91,480 $202,219 $ 3,487 $297,186 ======= ======== ======= ========
See Notes to Consolidated Financial Statements. Page 21 51 CONSOLIDATED STATEMENTS OF CASH FLOWS CITIZENS BANKING CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, (in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $33,596 $29,414 $25,770 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 6,441 5,303 5,597 Depreciation 7,272 6,228 5,480 Amortization of goodwill and other intangibles 4,687 1,602 1,017 Deferred income taxes (credit) 184 (171) 487 Net amortization on investment securities 3,019 3,232 9,459 Investment securities gains (198) (157) (763) Other 21 (2,260) 5,458 --------- ------- ------- Net cash provided by operating activities 55,022 43,191 52,505 --------- ------- ------- INVESTING ACTIVITIES: Net (increase) decrease in money market investments (21,599) (19,035) 6,831 Securities available-for-sale: Proceeds from sale 6,980 190,275 --- Proceeds from maturity 172,975 187,561 --- Purchase (130,782) (312,969) --- Securities held to maturity: Proceeds from sale --- --- 78,095 Proceeds from maturity --- --- 348,209 Purchase --- --- (379,245) Net increase in loans and leases (87,272) (39,177) (99,591) Purchases of premises and equipment (6,583) (4,772) (4,785) Net cash provided by (used for) acquisition of subsidiary (59,434) --- 8,412 -------- ------- -------- Net cash provided (used) by investing activities (125,715) 1,883 (42,074) -------- ------- -------- FINANCING ACTIVITIES: Net increase (decrease) in demand and savings deposits (81,726) (29,513) 557,114 Net increase (decrease) in time deposits 153,423 35,081 (577,045) Net increase (decrease) in short-term borrowings (45,415) (12,296) 18,164 Proceeds from issuance of long-term debt 115,000 --- --- Principal reductions in long-term debt (19,394) (5,616) (4,428) Cash dividends paid (12,770) (11,557) (9,937) Proceeds from stock options exercised 2,237 1,602 828 Shares acquired for retirement --- (3,986) (3,254) ---------- --------- --------- Net cash provided (used) by financing activities 111,355 (26,285) (18,558) ---------- --------- --------- Net increase (decrease) in cash and due from banks 40,662 18,789 (8,127) Cash and due from banks at beginning of year 132,092 113,303 121,430 ---------- --------- --------- Cash and due from banks at end of year $172,754 $132,092 $113,303 ========== ========= ========= Supplemental Cash Flow Information: Interest paid $95,267 $61,257 $63,104 Income taxes paid 12,580 10,235 6,661
See Notes to Consolidated Financial Statements. Page 22 52 NOTE 1. SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Citizens Banking Corporation ("Corporation") and its subsidiaries conform to generally accepted accounting principles. Management makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The following describes the Corporation's policies: CONSOLIDATION The Consolidated Financial Statements include the accounts of the Corporation and its subsidiaries after elimination of all material intercompany transactions and accounts. INVESTMENT SECURITIES Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" requires securities to be classified as held-to-maturity, available-for-sale or trading. Only those securities classified as held-to-maturity are reported at amortized cost, with those available-for-sale and trading reported at fair value with unrealized gains and losses included in shareholders' equity or income, respectively. The Corporation adopted this Statement effective January 1, 1994 and classified all of its investment portfolio in the available-for-sale category. Prior to adoption, all securities were classified in a single portfolio accounted for at amortized cost. In the event that an investment security is sold, the adjusted cost of the specific security sold is used to compute the applicable gain or loss. See also Note 3. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level considered by management to be adequate to absorb losses inherent in the loan portfolio. Management's evaluation is based on a continuing review of the loan portfolio and includes consideration of actual loss experience, the financial condition of borrowers, the size and composition of the loan portfolio, current and anticipated economic conditions and other pertinent factors. The allowance is increased by the provision charged to income and recoveries of loans previously charged off and reduced by loans charged off. The Corporation adopted Financial Accounting Standards Board Statement ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures" effective January 1, 1995. The statements require creditors to establish a valuation allowance for impaired loans. A loan is considered impaired when management determines it is probable that all the principal and interest due under the contractual terms of the loan will not be collected. The impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Prior to 1995, the allowance for loan losses related to these loans was based on the undiscounted cash flows or the fair value of the collateral for collateral dependent loans. PREMISES AND EQUIPMENT Premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally on a straight-line basis and are charged to expense over the lesser of the estimated useful life of the assets or lease term. Maintenance and repairs as well as gains and losses on dispositions are charged to expense as incurred. OTHER REAL ESTATE Other real estate includes properties acquired in satisfaction of a debt. These properties are carried at the lower of cost or fair value, net of estimated costs to sell, based upon current appraised value. Losses arising from the acquisition of such properties are charged against the allowance for loan losses. Subsequent valuation adjustments and gains or losses on disposal of these properties are charged to other expenses as incurred. INTANGIBLE ASSETS Goodwill, the unamortized cost of acquiring subsidiaries in excess of the fair value of identifiable net assets at the date acquired, is amortized on a straight line basis over 15 years. The carrying amount of goodwill is reviewed if the facts and information supporting the initially recorded amount changes. If the review indicates that impairment may exist, the current carrying amount is reduced by the estimated shortfall. INCOME TAXES The Corporation and its subsidiaries file a consolidated federal income tax return. Income tax expense is based on income as reported in the Consolidated Statements of income. When income and expenses are recognized Page 23 53 in different periods for tax purposes, applicable deferred taxes are provided in the Consolidated Financial Statements. LOAN INTEREST AND FEE INCOME Interest on loans is generally accrued and credited to income based upon the principal amount outstanding. Loans are placed on nonaccrual status when collectibility of principal or interest is considered doubtful, or payment of principal or interest is past due 90 days or more and the loan is not well secured and in the process of collection. When these loans (including a loan impaired under SFAS 114) are placed on nonaccrual status, all interest previously accrued but unpaid is reversed against current year interest income. Interest payments received on nonaccrual loans are credited to income if future collection of principal is probable. Loans are normally restored to accrual status when interest and principal payments are current and it is believed that the financial condition of the borrower has improved to the extent that future principal and interest payments will be met on a timely basis. Loan origination fee income, net of direct origination costs and certain incremental direct costs, is deferred and amortized as a yield adjustment over the estimated term of the related loans by methods that approximate the level yield method. Loan fees on unused commitments and fees related to loans sold are recognized currently as other income. NET INCOME PER SHARE Primary and fully diluted net income per share are computed based on the weighted average number of shares outstanding in each period and dilutive common stock equivalents outstanding in each period. Common stock equivalents consist of common stock issuable under the assumed exercise of stock options granted under the Corporation's stock option plans, using the treasury stock method. The weighted average number of shares has been adjusted for a two-for-one stock split effected in the form of a dividend paid May 12, 1993 to shareholders of record on April 30, 1993. CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. NOTE 2. ACQUISITIONS At the close of business on February 28, 1995, the Corporation purchased the four Michigan affiliates of Banc One Corporation, located in East Lansing, Fenton, Sturgis and Ypsilanti, for $115 million in cash. The transaction was accounted for as a purchase and the four banks ("acquired banks") were merged into Citizens Commercial & Savings Bank headquartered in Flint, Michigan effective immediately after the acquisition. Total assets acquired of $670 million included net loans of $532 million, investment securities and money market investments of $57 million and deposits of $541 million. Cost-in-excess of the fair value of identifiable net assets acquired was $59.2 million and is being amortized over 15 years. The 1995 results reflect ten months of operations for the four acquired banks. The unaudited pro-forma combined operating results of the Corporation and the four banks, assuming the acquisition was consummated on January 1, 1994, are as follows:
- ----------------------------------------- (in thousands except per share amounts) 1995 1994 - ----------------------------------------- Net interest income $142,091 $137,532 Net income 35,679 27,692 Net income per share: Primary $2.45 $1.91 Fully diluted 2.44 1.91 - -----------------------------------------
On October 1, 1993, the Corporation purchased Royal Bank Group, Inc. and its subsidiary, National Bank of Royal Oak ("NBRO"), which is located in Oakland County, Michigan. All of the outstanding common shares of Royal Bank Group, Inc. were exchanged for 1,073,053 shares of common stock of the Corporation and $207,000 in cash. Concurrent with the acquisition, Royal Bank Group, Inc. was dissolved and its subsidiary, NBRO, transferred to the Corporation. Total assets acquired of $208 million included net loans of $126 million, investment securities and money market investments of $53 million, and deposits of $181 million. The acquisition was accounted for as a purchase and, accordingly, the Consolidated Financial Statements include NBRO's results of operations from the date of acquisition. Cost in excess of the fair value of identifiable net assets acquired was $9.7 million and is being amortized over 15 years. Page 24 54 NOTE 3. INVESTMENT SECURITIES The amortized cost, estimated fair value and gross unrealized gains and losses of investment securities follow:
- --------------------------------------------------------------------------------------------------------------------- December 31, 1995 December 31, 1994 --------------------------------------------- ------------------------------------------- Estimated Gross Gross Estimated Gross Gross Amortized Fair Unrealized Unrealized Amortized Fair Unrealized Unrealized (in thousands) Cost Value Gains Losses Cost Value Gains Losses - --------------------------------------------------------------------------------------------------------------------- U.S. Treasury $197,872 $198,462 $958 $367 $222,910 $211,965 $1 $10,946 Federal agencies: Mortgage-backed 77,349 77,477 471 343 82,980 79,476 14 3,518 Other 70,436 70,546 135 25 40,867 39,542 --- 1,325 State and municipal 209,068 213,491 5,183 760 229,055 226,423 2,998 5,630 Mortgage and asset-backed 4,090 4,149 58 --- 2,021 2,040 19 --- Other 6,732 6,787 55 --- 4,483 4,553 71 1 -------- -------- ------ ------ -------- -------- ------ ------- Total $565,547 $570,912 $6,860 $1,495 $582,316 $563,999 $3,103 $21,420 ======== ======== ====== ====== ======== ======== ====== =======
The amortized cost and approximate fair value of debt securities at December 31, 1995, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to prepayment or early call privileges of the borrower.
- ----------------------------------------------------------- Estimated Amortized Fair (in thousands) Cost Value - ----------------------------------------------------------- Due within one year $162,630 $178,796 One to five years 237,092 224,026 Five to ten years 45,729 47,065 After ten years 32,185 32,872 -------- -------- 477,636 482,759 Equity securities 6,472 6,527 Mortgage and asset-backed securities 81,439 81,626 -------- -------- Total $565,547 $570,912 ======== ========
Sales of investment securities resulted in realized gains and losses as follows:
- ----------------------------------------------- Year Ended December 31, (in thousands) 1995 1994 1993 - ----------------------------------------------- Securities gains $202 $326 $773 Securities losses (4) (169) (10) ---- ---- ---- Net gain $198 $157 $763 ==== ==== ====
Effective January 1, 1994, the Corporation adopted Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Statement requires the Corporation to classify securities into one of three categories based on its intent and ability to hold the investments. These categories include: held-to-maturity (securities that the Corporation has the positive intent and ability to hold to maturity), trading (securities bought and held principally for the purpose of selling in the near future) and available-for-sale (securities not classified in either of the two other categories). At adoption the Corporation classified all of its investment portfolio in the available-for-sale category. Securities classified as available-for-sale are recorded at fair value with the unrealized gain or loss reported as a separate component of shareholders' equity. Adoption increased shareholders' equity on January 1, 1994 by $6.6 million after deferred taxes of $3.5 million. In December 1994, the Corporation adopted Financial Accounting Standards Board Statement No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS 119"). This Statement defines a derivative as a future, forward, swap, option contract, or other financial instrument with similar characteristics. The Statement requires expanded disclosures about these types of financial instruments. The Corporation does not invest in derivatives or related types of financial instruments except for Federal agency collateralized mortgage obligations and, therefore, the adoption of the Statement did not have a material effect. The Corporation's policy only allows the purchase of collateralized mortgage obligations that are composed of mortgage backed securities issued by a Federal Agency. Any CMO's purchased are in early tranches with short average lives. These tranches are classified in the Planned Amortization Class and have well-defined prepayment assumptions (Super PAC's). The Corporation's CMO's are periodically tested to ensure compliance with guidelines established by the Federal Financial Institutions Examination Council. Securities with amortized cost of $278.2 million at December 31, 1995, and $260.5 million at December 31, 1994, were pledged to secure public deposits, repurchase agreements, and other liabilities. Except for obligations of the U.S. Government and its agencies, no holdings of securities of any single issuer exceeded 10% of consolidated shareholders' equity at December 31, 1995 or 1994. Page 25 55 NOTE 4. LOANS AND NONPERFORMING ASSETS The Corporation extends credit primarily within the local markets of its seven bank subsidiaries. These natural geographic concentrations extend along the Interstate 75 corridor within the State of Michigan from northern suburban Detroit to the greater Grayling/Gaylord area, as well as the western suburban market of Chicago, Illinois. During 1995, the Corporation expanded its market presence into East Lansing, Fenton, Sturgis and Ypsilanti. This expands the Corporation's opportunities within the western Detroit, central and southwestern Michigan market areas. The Corporation has limited its credit risk by establishing guidelines to review its aggregate outstanding commitments and loans to particular borrowers, industries and geographic areas. Collateral is secured based on the nature of the credit and management's credit assessment of the customer. The loan portfolio is widely diversified by borrowers and industry groups with no single concentration exceeding 10% of total loans. The Corporation has no loans to foreign countries and generally does not participate in large national loan syndications or highly leveraged transactions. Most of the Corporation's commercial real estate loans consist of mortgages on owner-occupied properties. Those borrowers are involved in business activities other than real estate, and the sources of repayment are not dependent on the performance of the real estate market. The Corporation changed its nonperforming asset policy in the third quarter of 1995 to include loans 90 days past due and still accruing in the nonperforming asset category. Previously these loans were considered underperforming assets. All nonperforming asset disclosures have been adjusted to reflect this change. A summary of nonperforming assets follows:
- --------------------------------------------------------------- December 31, (in thousands) 1995 1994 - --------------------------------------------------------------- Nonperforming loans: Nonaccrual $18,624 $18,156 Loans 90 days past due (still accruing) 432 1,253 Restructured 494 299 ------ ------ Total nonperforming loans 19,550 19,708 Other real estate 1,568 2,230 ------ ------ Total nonperforming assets $21,118 $21,938 ====== ======
The effect of nonperforming loans on interest income follows:
- ---------------------------------------------------------------- Year Ended December 31, (in thousands) 1995 1994 1993 - ---------------------------------------------------------------- Interest income: At original contract rates $2,509 $1,879 $1,589 As actually recognized 1,427 1,128 697 ------ ------ ------ Interest foregone $1,082 $ 751 $ 892 ====== ====== ======
There are no significant commitments outstanding to lend additional funds to customers whose loans were classified as nonaccrual or restructured at December 31, 1995. At December 31, 1995, loans considered to be impaired totaled $16.6 million (of which $10.1 million were on a nonaccrual basis). Included within this amount is $4.7 million of impaired loans for which the related allowance for loan losses is $0.8 million and $11.9 million of impaired loans for which the fair value exceeded the recorded investment in the loan. The average recorded investment in impaired loans during the year ended December 31, 1995 was approximately $19.9 million. For the year ended December 31, 1995, the Corporation recognized interest income of $1.5 million which included $0.8 million of interest income recognized using the cash basis method of income recognition. Certain directors and executive officers of the Corporation and its significant subsidiaries, including their families and entities in which they have 10% or more ownership, were customers of the banking subsidiaries. Total loans to these customers aggregated $11.2 million and $12.4 million at December 31, 1995 and 1994, respectively. During 1995, new loans of $13.0 million were made and repayments totaled $14.2 million. All such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those for comparable transactions with unrelated parties and did not involve more than normal risk of collectibility. NOTE 5. ALLOWANCE FOR LOAN LOSSES A summary of changes in the allowance for loan losses follows:
- ---------------------------------------------------------------- Year Ended December 31, (in thousands) 1995 1994 1993 - ---------------------------------------------------------------- Balance - January 1 $24,714 $22,547 $19,404 Allowance of acquired banks 7,235 --- 1,642 Provision for loan losses 6,441 5,303 5,597 Charge-offs (7,921) (6,114) (6,396) Recoveries 4,302 2,978 2,300 ------- ------- ------- Net charge-offs (3,619) (3,136) (4,096) ------- ------- ------- Balance - December 31 $34,771 $24,714 $22,547 ======= ======= =======
Page 26 56 NOTE 6. PREMISES AND EQUIPMENT A summary of premises and equipment follows:
- ------------------------------------------------------------------ December 31, (in thousands) 1995 1994 - ------------------------------------------------------------------ Land $ 10,792 $ 8,229 Buildings 71,363 59,608 Leasehold improvements 3,391 2,664 Furniture and equipment 63,843 53,430 -------- -------- 149,389 123,931 Accumulated depreciation and amortization (86,242) (71,398) -------- -------- Total $ 63,147 $ 52,533 ======== ========
Certain branch facilities and computer equipment are leased under various operating leases. Total rental expense, including expenses related to these operating leases, was $2.1 million in 1995; $1.8 million in 1994; and $1.6 million in 1993. Future minimum rental commitments under noncancelable operating leases, net of sublease payments, are as follows at December 31, 1995: $1.0 million in 1996; $0.8 million in 1997; $0.7 million in 1998; $0.7 million in 1999; and $0.6 million in 2000, and $1.5 million after 2000. NOTE 7. DEPOSITS A summary of deposits follows:
- -------------------------------------------------------------------- (in thousands) 1995 1994 - -------------------------------------------------------------------- Noninterest-bearing demand $ 506,116 $ 416,395 Interest-bearing demand 318,390 252,816 Savings 907,691 843,975 Time deposits over $100,000 219,158 111,930 Other time deposits 913,346 627,202 ---------- ---------- Total $2,864,701 $2,252,318 ========== ==========
NOTE 8. SHORT-TERM BORROWINGS Short-term borrowings consist primarily of federal funds purchased and securities sold under agreements to repurchase. Federal funds purchased are overnight borrowings from other financial institutions. Securities sold under agreements to repurchase are secured transactions done principally with customers and generally mature within thirty days. Other short-term borrowed funds consist of demand notes to the U.S. Treasury. Information relating to federal funds purchased and securities sold under agreements to repurchase follows:
- ------------------------------------------------------------ (in thousands) 1995 1994 1993 - ------------------------------------------------------------ At December 31: Balance $130,556 $125,581 $116,777 Weighted average interest rate paid 4.74% 4.39% 2.91% During the year: Maximum outstanding at any month-end $146,429 $129,846 $137,067 Daily average 128,141 120,356 116,624 Weighted average interest rate paid 4.83% 3.63% 3.08%
NOTE 9. LONG-TERM DEBT A summary of long-term debt follows:
- ------------------------------------------------------------------ December 31, (in thousands) 1995 1994 - ------------------------------------------------------------------ Citizens Banking Corporation (Parent only): Floating rate term notes: Maturing March 1995 --- $ 1,200 Maturing October 1997 $ 2,500 3,750 Revolving credit facility: Maturing December 2001 98,378 --- -------- -------- Total 100,878 4,950 Subsidiaries: Subordinated debt 4,057 --- Nonrecourse lease financing 36 99 Other 440 200 -------- -------- Total 4,533 299 -------- -------- Total long-term debt $105,411 $ 5,249 ======== ========
The floating rate term note maturing in October 1997 is payable in equal annual principal payments through October 1997. Interest is payable quarterly at a rate selected by the Corporation from certain indices available under the agreement. At December 31, 1995, the rate was 5.28%. To finance the acquisition of the acquired banks, the Corporation's Parent company obtained a $115 million seven year amortizing revolving credit facility. The revolving credit facility, maturing December 2001, is payable in annual payments of $16.5 million with a final payment of $16 million. The revolving credit facility is currently comprised of $75 million at a fixed rate of 7.65%. Of this amount, $16.5 million reprices in March 1996, $51.5 million in March 1997 and $7 million in March 1998. The remaining $23.5 million outstanding has an interest rate based on a LIBOR index. Currently $20 million is priced at a rate of 6.24% and $3.5 million is priced at a rate of 6.36%. Interest is payable quarterly. The Page 27 57 Parent company services the debt's principal and interest payments with dividends from the subsidiary banks. The agreement also requires the Corporation to maintain certain financial covenants. The Corporation is in full compliance with all debt covenents as of December 31, 1995. The subordinated debt was assumed by the Corporation as part of the acquisition. The total subordinated debt is payable on April 15, 2003. Interest is payable semiannually at a fixed rate of 6.72%. Other subsidiary debt also assumed as part of the acquisition consists of an EDC mortgage due April 1, 2002. Interest is payable monthly at an interest rate of 75% of the prime rate. Nonrecourse lease financing represents borrowings from unaffiliated lenders against future lease payments. In the event of default by a lessee, the lender has security in the underlying leased equipment and has no further recourse against the Corporation. On December 31, 1995, nonrecourse lease financing notes were at fixed rates of interest of 9.75% and were amortized with equal monthly payments. Maturities of long-term debt during the next five years follow:
- ---------------------------------------------------- (in thousands) Parent Subsidiaries Consolidated - ---------------------------------------------------- 1996 $17,694 $146 $17,840 1997 17,694 0 17,694 1998 16,490 0 16,490 1999 16,500 0 16,500 2000 16,500 0 16,500 Over 5 Years 16,000 4,387 20,387 -------- ------ -------- Total $100,878 $4,533 $105,411
NOTE 10. EMPLOYEE BENEFIT PLANS The Corporation and its subsidiaries have various employee benefit plans. Costs of various benefit arrangements charged to operations each year follow:
- -------------------------------------------------------------------- Year Ended December 31, (in thousands) 1995 1994 1993 - -------------------------------------------------------------------- Defined benefit pension plans: Qualified plan - funded: Service Cost $1,541 $1,534 $1,367 Interest cost 2,339 2,188 2,214 Actual return on plan assets (6,825) 281 (3,311) Net amortization and deferral 2,783 (4,014) (438) ------ ------ ------- Net income (162) (11) (168) ------ ------ ------- Supplemental plans - unfunded: Service cost 103 105 89 Interest cost 119 106 97 Net amortization and deferral 38 58 38 ------ ------ ------- Net cost 260 269 224 Net pension cost 98 258 56 Defined contribution 401(k) plan 1,738 1,431 1,340 ------ ------ ------- Total benefit cost $1,836 $1,689 $1,396 ====== ====== =======
PENSION PLANS The Corporation maintains a qualified defined benefit plan covering substantially all full-time employees. Under the plan, benefits are based on the employee's length of service and average compensation during the highest consecutive 60 month period out of the final 120 months preceding retirement. The Corporation's funding policy is to contribute annually an amount sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Corporation may determine to be appropriate. Contributions are intended to provide for benefits attributed to past service and for benefits expected to be earned in the future. The funded status and amounts recognized in the Corporation's Consolidated Balance Sheets for the qualified defined benefit plan follow:
- ----------------------------------------------------------------------------- December 31, (in thousands) 1995 1994 - ----------------------------------------------------------------------------- Actuarial present value of benefit obligation: Vested benefits $21,281 $21,517 Nonvested benefits 623 628 ------- ------- Accumulated benefit obligation 21,904 22,145 Effect of projected future compensation levels 12,257 5,997 ------- ------- Projected benefit obligation 34,161 28,142 Plan assets at fair value, primarily listed stocks and bonds, corporate obligations and money market and mutual funds 41,483 35,638 ------- ------- Plan assets in excess of projected benefit obligation 7,322 7,496 Unrecognized net gain (6,001) (6,611) Unrecognized prior service cost 115 133 Unrecognized net asset at transition being recognized over 16 years (1,125) (1,326) ------- ------- Prepaid (accrued) pension cost recognized in the Consolidated Balance Sheets $ 311 $ (308) ======= =======
Actuarial assumptions used in determining the benefit obligation at December 31 were:
- --------------------------------------------------------- 1995 1994 1993 - --------------------------------------------------------- Weighted average discount rate 7.75% 8.50% 7.75% Rate of increase in future compensation levels (1) (1) (1) Long-term rate of return 9.00 9.00 9.00
(1) Scaled by age of plan participant - 9.00% at age 24 or under declining to 4.00% at age 50 or older The Corporation also maintains unfunded supplemental benefit plans, which are nonqualified plans providing certain officers with defined pension benefits in excess of limits imposed by Federal tax law. At December 31, 1995, the projected benefit obligation for these plans totaled $1.7 million, of which $113,000 was subject to later amortization. The remaining $1.6 million is included in other liabilities in the accompanying Consolidated Balance Sheets. Page 28 58 At December 31, 1994, the projected benefit obligation for these plans totaled $1.4 million of which $74,000 was subject to later amortization. The remaining $1.3 million is included in other liabilities in the accompanying Consolidated Balance Sheets. DEFINED CONTRIBUTION PLAN The Corporation maintains a defined contribution 401(k) savings plan covering substantially all full-time employees. Under the plan, employee contributions are partially matched by the Corporation. Effective January 1, 1993, the employer matching contribution was increased to 75 percent of the first 6% (100 percent of the first 3% plus 50 percent of the next 3%) of each eligible employee's base salary contributed to the plan. In addition, one third of these matching contributions are used to fund a postretirement medical savings account established within the plan for each contributing employee. POSTEMPLOYMENT BENEFITS Effective January 1, 1994, the Corporation adopted Financial Accounting Standards Board Statement No. 112, "Employers' Accounting for Postemployment Benefits." It requires, under certain circumstances, accrual of the estimated cost of benefits provided to former or inactive employees after employment but before retirement. Such benefits (referred to as postemployment benefits) include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits, job training and counseling, and continuation of benefits such as health care and life insurance coverage. The unrecorded liability for these accrued benefits at adoption and at year-end 1994 and 1995 was not material. NOTE 11. POSTRETIREMENT BENEFIT PLAN The Corporation maintains an unfunded postretirement defined benefit plan offering medical and life insurance benefits. This plan, as amended effective January 1, 1993, provides postretirement medical benefits at certain subsidiaries to full-time employees who retire at normal retirement age, have attained age 50 prior to January 1, 1993 and have at least 15 years of credited service under the Corporation's defined benefit pension plan. This plan is subject to a vesting schedule, is contributory and contains other cost-sharing features such as deductibles and coinsurance. Retirees not meeting the above eligibility requirements may participate in the medical benefit provided by the plan, as amended, at their own cost. Those retired prior to January 1, 1993 receive benefits provided by the plan prior to its amendment. That plan includes dental care, has some contribution requirements, and has less restrictive eligibility requirements. Under either plan, life insurance is provided to all retirees on a reducing basis for 5 years. The following table presents the plan's unfunded status reconciled with amounts recognized in the Corporation's Consolidated Balance Sheets at December 31:
- ------------------------------------------------------------- (in thousands) 1995 1994 - ------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $(10,073) $ (9,116) Fully eligible plan participants --- (14) Other active plan participants (218) (827) -------- -------- Total unfunded obligation (10,291) (9,957) Unrecognized net gain (2,878) (3,313) Unrecognized prior service cost (2,200) (2,655) -------- -------- Accrued postretirement benefit cost $(15,369) $(15,925) ======== ======== - -------------------------------------------------------------
Net periodic postretirement benefit cost includes the following components:
- -------------------------------------------------------------------- Year Ended December 31, (in thousands) 1995 1994 1993 - -------------------------------------------------------------------- Service cost $10 $48 $44 Interest cost 761 896 914 Net amortization and deferral (643) (455) (516) ---- ---- ---- Net periodic postretirement benefit cost $128 $489 $442 ==== ==== ==== - --------------------------------------------------------------------
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.75% and 8.50% at December 31, 1995 and 1994, respectively. The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 9% for 1996 (10% for 1995) and is assumed to decrease 1% annually to 5% by the year 2000 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percent in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 and 1994 by $1.0 million, and $1.1 million, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1995 by $84,000. Page 29 59 NOTE 12. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation's deferred tax assets and liabilities as of December 31, 1995 and 1994 follow:
- ----------------------------------------------------- (in thousands) 1995 1994 - ----------------------------------------------------- Deferred tax assets: Allowance for loan losses $12,091 $8,511 Net unrealized losses on securities --- 6,411 Accrued postemployment benefits other than pensions 5,379 5,574 Other deferred tax assets 3,472 3,523 ------- ------ Total deferred tax assets 20,942 24,019 ------- ------ Deferred tax liabilities: Acquisition premium on loans 2,076 1,119 Tax over book depreciation 1,965 1,972 Net unrealized gains on securities 1,878 --- Other deferred tax liabilities 3,661 1,774 ------- ------ Total deferred tax liabilities 9,580 4,865 ------- ------ Net deferred tax assets $11,362 $19,154 ======= ======= - -----------------------------------------------------
Income tax expense (benefit) consists of the following:
- -------------------------------------------------------------- Year Ended December 31, (in thousands) 1995 1994 1993 - -------------------------------------------------------------- Currently payable $12,732 $10,463 $6,426 Deferred taxes (credit) 73 (171) 768 Effect of tax rate change on deferred taxes --- --- (280) ------- ------- ------ Total income tax expense $12,805 $10,292 $6,914 ======= ======= ====== - --------------------------------------------------------------
A reconciliation of income tax expense to the amount computed by applying the Federal statutory rate of 35% to income before income taxes follows: - -------------------------------------------------------------------- Year Ended December 31, (in thousands) 1995 1994 1993 - -------------------------------------------------------------------- Tax at Federal statutory rate applied to income before income taxes $16,240 $13,897 $11,439 Increase (decrease) in taxes resulting from: Tax-exempt interest (3,539) (4,045) (4,371) Other 104 440 (154) ------- ------- ------ Total income tax expense $12,805 $10,292 $6,914 ======= ======= ====== - --------------------------------------------------------------------
NOTE 13. SHAREHOLDERS' EQUITY In April, 1993, the Corporation declared a two-for-one stock split effected in the form of a dividend paid May 12, 1993 to shareholders of record April 30, 1993. All share and per share amounts have been restated to give effect to the split. SHAREHOLDERS' RIGHTS PLAN The Corporation's Shareholders' Rights Plan is designed to provide certain assurances that all shareholders are treated fairly in connection with certain types of business transactions involving an attempt to acquire controlling interest in the Corporation. Under the plan, one right attaches to each outstanding share of common stock and represents the right to purchase from the Corporation 1/100 of a share of a new series of preferred stock at the initial exercise price of $37.50. The rights become exercisable only if a person or group without Board approval announces an intention to acquire 15% or more of the Corporation's outstanding common stock or makes a tender offer for that amount of stock. Upon the occurrence of such an event, the right "flips in" and becomes the right to purchase one share of common stock of the Corporation or the surviving company at 50% of the market price. These rights are redeemable by the Board for $0.01 per right and expire July 20, 2000. The rights will cause substantial dilution to a person or entity attempting to acquire the Corporation without conditioning the offer on the rights being redeemed by the Board. STOCK REPURCHASE PLAN The Corporation maintains a stock repurchase program initiated in November 1987. At year end 1995, this program, which has been expanded several times, allowed for the repurchase of 1,600,000 shares. As of December 31, 1995, a total of 1,132,470 shares have been repurchased under the program at an average price of $14.31 per share. These shares were reissued in connection with a purchase acquisition in October 1993 and the Corporation's stock option plan. In 1994, shares of common stock in treasury were accorded the treatment as if retired; however, such shares remain available for reissue. Such treatment was made retroactively to January 1, 1993 in the Consolidated Financial Statements. Page 30 60 STOCK OPTION PLAN The Corporation's stock option plan, as amended and restated in April 1992, authorizes the granting of incentive and nonqualified stock options, tandem stock appreciation rights, restricted stock and performance share grants to key employees. Aggregate grants under the plan may not exceed 2,000,000 shares within any five year period and are limited annually to 3% of the Corporation's outstanding common stock as of the first day of the year, plus any unused shares that first become available for grants in the prior year. Stock options outstanding under the plan were granted at a price not less than the fair market value of the shares on the date of grant. Replacement options may be granted upon exercise of a nonqualified stock option by payment of the exercise price with shares of the Corporation's common stock. A replacement option provides the employee with a new option to purchase the number of shares surrendered at an option price equal to the fair market value of the Corporation's common stock on the date the underlying nonqualified stock option is exercised. During 1995, 1994 and 1993, 168,927, 114,398 and 76,417 shares, respectively, were surrendered by employees for payment to the Corporation for stock option exercises for which an equal number of replacement options were granted. Options may be granted until January 16, 2002. The options terminate ten years from the date of grant and are exercisable beginning six months from the date of grant or for certain options, granted since April 1992, are exercisable subject to a pre-determined option vesting schedule based on achievement of certain return on average asset targets. Canceled or expired options become available for future grants. The Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock Based Compensation" in October 1995 and is effective for 1996 financial statements. The Corporation does not intend to adopt the recognition provisions of the Statement but will continue accounting for stock options in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock issued to Employees" as permitted by the new Statement. Therefore, adoption will not materially impact the Corporation. A summary of stock option transactions under the plan for 1993, 1994 and 1995 follows:
- -------------------------------------------------------------------------------- Options Option Price ---------------------- ---------------------- Available Per Share for Grant Outstanding Range Average - -------------------------------------------------------------------------------- January 1, 1993 233,662 1,253,326 $9.875-18.315 $14.41 Authorized 393,093 --- --- --- Granted (141,214) 141,214 19.125-26.000 22.39 Exercised --- (145,456) 9.875-21.630 15.94 -------- --------- ------------- ------ December 31, 1993 485,541 1,249,084 9.875-26.000 15.13 Authorized 331,000 --- --- --- Granted (172,098) 172,098 23.250-27.250 25.40 Exercised --- (291,502) 9.875-21.630 15.35 Canceled 3,025 (3,025) 17.655-21.630 19.26 -------- --------- ------------- ------ December 31, 1994 647,468 1,126,655 9.875-27.250 16.63 Authorized 137,463 --- --- --- Granted (388,227) 388,227 26.000-30.813 27.22 Exercised --- (374,479) 9.875-26.375 17.68 Canceled 5,530 (5,530) 21.630-26.000 25.60 -------- --------- ------------- ------ December 31, 1995 402,234 1,134,873 9.875-30.813 19.86 ======== =========== Exercisable - December 31, 1995 867,357 9.875-29.938 17.51 ===========
NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES The Consolidated Financial Statements do not reflect various loan commitments (unfunded loans and unused lines of credit) and letters of credit originated in the normal course of business. Loan commitments are made to accommodate the financial needs of customers. Generally, new loan commitments do not extend beyond 90 days and unused lines of credit are reviewed at least annually. Letters of credit guarantee future payment of customer financial obligations to third parties. They are issued primarily for services provided or to facilitate the shipment of goods, and generally expire within one year. Page 31 61 Both arrangements have essentially the same level of credit risk as that associated with extending loans to customers and are subject to the Corporation's normal credit policies. Inasmuch as these arrangements generally have fixed expiration dates or other termination clauses, most expire unfunded and do not necessarily represent future liquidity requirements. Collateral is obtained based on management's assessment of the customer and may include receivables, inventories, real property and equipment. Amounts available to customers under loan commitments and letters of credit follow:
- -------------------------------------------------- December 31, (in thousands) 1995 1994 - -------------------------------------------------- Loan commitments: Commercial $ 735,513 $466,391 Real estate-construction 19,675 20,882 Real estate-mortgage 17,850 3,993 Credit card and home equity credit lines 281,233 189,483 Other consumer installment 11,323 12,171 ---------- -------- Total $1,065,594 $692,920 ========== ======== Standby letters of credit $ 42,981 $ 16,858 Commercial letters of credit 3,257 5,786 - --------------------------------------------------
The Corporation and its subsidiaries are parties to litigation arising in the ordinary course of business. Management believes that the aggregate liability, if any, resulting from these proceedings would not have a material effect on the Corporation's consolidated financial position. NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Financial Accounting Standards Board Statement No. 107, "Disclosure About Fair Value of Financial Instruments" ("SFAS 107"). Where quoted market prices are not available, as is the case for a significant portion of the Corporation's financial instruments, the fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the derived fair value estimates presented herein cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts the Corporation could realize in a current market exchange. In addition, the fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Corporation has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include the Corporation's mortgage servicing operation, brokerage network, net deferred tax asset, premises and equipment, goodwill and deposit based intangibles. In addition, tax ramifications related to the realization of unrealized gains and losses such as those within the investment securities portfolio can also have a significant effect on estimated fair values and have not been considered in the estimates. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Corporation. The estimated fair values of the Corporation's financial instruments follow:
- --------------------------------------------------------------------------------------------------- December 31, 1995 December 31, 1994 --------------------- ----------------------- Carrying Estimated Carrying Estimated (in thousands) Amount Fair Value Amount Fair Value - --------------------------------------------------------------------------------------------------- Financial assets: Cash and money market investments $ 322,588 $ 322,600 $ 237,227 $ 237,700 Investment securities 570,912 570,900 563,999 564,000 Net loans(1) 2,333,799 2,360,400 1,714,244 1,705,000 Financial liabilities: Deposits 2,864,701 2,874,000 2,252,318 2,253,000 Short-term borrowings 146,024 146,000 146,431 146,400 Long-term debt 105,411 106,600 5,249 5,300 Off-balance sheet financial instrument liabilities: Loan commitments --- 1,224 --- 814 Standby and commercial letters of credit --- 231 --- 113 - ---------------------------------------------------------------------------------------------------
(1) Excludes lease financing which for purposes of SFAS 107 disclosure is not considered a financial instrument. Page 32 62 The various methods and assumptions used by the Corporation in estimating fair value for its financial instruments are set forth below: CASH AND MONEY MARKET INVESTMENTS The carrying amounts reported in the balance sheet for cash and money market investments approximate those assets' fair values because they mature within six months and do not present unanticipated credit concerns. INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED AND ASSET-BACKED SECURITIES) The carrying amounts reported in the balance sheet for investment securities approximate those assets' fair values as all investment securities are being classified in the available-for-sale category. SFAS 115 requires securities carried in the available-for-sale category to be carried at fair value. See Note 3. The fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. LOANS RECEIVABLE Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, credit card, and other consumer. Each loan category is further segmented into fixed and variable-rate interest types and for certain categories by performing and nonperforming. For performing variable-rate loans that reprice frequently (within six months) and with no significant change in credit risk, fair values are based on carrying values. Similarly, for credit card loans with no significant credit concerns and average interest rates approximating current market origination rates, the carrying amount is a reasonable estimate of fair value. Fair values of other loans (e.g., fixed-rate commercial, commercial real estate, residential mortgage and other consumer loans) are estimated by discounting the future cash flows using interest rates currently being offered by the Corporation for loans with similar terms and remaining maturities ("new loan rates"). Management believes the risk factor embedded in the new loan rates adequately represents the credit risk within the portfolios. Fair values for nonperforming loans are estimated after giving consideration to credit risk and estimated cash flows and discount rates based on available market and specific borrower information. The carrying amount of accrued interest for all loan types approximates its fair value. DEPOSIT LIABILITIES Under SFAS 107, the fair value of demand deposits (e.g., interest and noninterest checking, passbook savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for certificates of similar remaining maturities. SHORT-TERM BORROWINGS The carrying amounts of federal funds purchased, securities sold under agreement to repurchase and other short-term borrowings approximate their fair values. LONG-TERM DEBT The carrying value of the Corporation's variable-rate long-term debt approximates its fair value. The fair value of its fixed-rate long-term debt (other than deposits) is estimated using discounted cash flow analyses, based on the Corporation's current incremental borrowing rates for similar types of borrowings arrangements. LOAN COMMITMENTS AND LETTERS OF CREDIT The fair value of loan commitments and letter of credit guarantees is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. Page 33 63 NOTE 16. REGULATORY MATTERS The Federal Reserve Bank requires the Corporation's banking subsidiaries to maintain certain noninterest-bearing deposits. These reserve balances vary depending upon the level of customer deposits in the subsidiary banks. During 1995 and 1994, the average reserve balances were $41.2 million and $36.2 million, respectively. The bank subsidiaries are also subject to limitations under banking laws on extensions of credit to members of the affiliate group and on dividends that can be paid to the Corporation. Generally extensions of credit are limited to 10% to any one affiliate and 20% in aggregate to all affiliates of a subsidiary bank's capital and surplus (net assets) as defined. Unless prior regulatory approval is obtained, dividends declared in any calendar year may not exceed the retained net profit, as defined, of that year plus the retained net profit of the preceding two years. At January 1, 1996, the bank subsidiaries could distribute to the Corporation approximately $23.2 million in dividends without regulatory approval. Their 1996 net income will also become available for such dividends. NOTE 17. CITIZENS BANKING CORPORATION (PARENT ONLY) STATEMENTS Condensed financial statements of Citizens Banking Corporation (Parent Only) follow: BALANCE SHEETS CITIZENS BANKING CORPORATION (PARENT ONLY)
December 31, (in thousands) 1995 1994 - ----------------------------------------------------------------- ASSETS: Cash $ 5 $ 4 Interest-bearing deposit with subsidiary bank 30,000 --- Money market investments 14,544 14,511 Loans - commercial paper --- 5,000 Investment securities 218 5,331 Investment in bank subsidiaries 348,676 234,324 Goodwill - net 5,041 5,837 Other assets 4,890 2,900 -------- -------- TOTAL ASSETS $403,374 $267,907 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Long-term debt $100,878 $ 4,950 Other liabilities 5,310 4,227 -------- -------- Total liabilities 106,188 9,177 Shareholders' equity 297,186 258,730 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $403,374 $267,907 ======== ========
Page 34 64 STATEMENTS OF INCOME CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31, (in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- INCOME Dividends from subsidiaries - principally banks $24,388 $24,211 $20,841 Interest from subsidiaries 1,413 150 183 Other 1,605 646 392 ------- ------- ------- Total 27,406 25,007 21,416 ------- ------- ------- EXPENSES Interest 7,374 371 425 Amortization of goodwill 796 856 908 Salaries and employee benefits 764 780 2,028 Service fees paid to subsidiaries 1,054 879 1,401 Other noninterest expense 949 1,564 855 ------- ------- ------ Total 10,937 4,450 5,617 ------- ------- ------ Income before income taxes and equity in undistributed earnings of subsidiaries 16,469 20,557 15,799 Income tax benefit 3,195 809 1,501 Equity in undistributed earnings of subsidiaries - principally banks 13,932 8,048 8,470 ------- ------- ------ NET INCOME $33,596 $29,414 $25,770 ======= ======= =======
STATEMENTS OF CASH FLOWS CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31, (in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $33,596 $29,414 $25,770 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of goodwill 796 856 908 Equity in undistributed earnings of subsidiaries (13,932) (8,048) (8,470) Other (967) 1,658 (326) --------- ----- ------ Net cash provided by operating activities 19,493 23,880 17,882 INVESTING ACTIVITIES Net increase in interest-bearing deposit at subsidiary bank (30,000) --- --- Net (increase) decrease in money market investments (33) 1,410 2,790 Purchases of investment securities --- (18,646) (3,043) Proceeds from maturities of investment securities 5,146 16,748 328 Net (increase) decrease in loans 5,000 (5,000) --- Purchase of and capital contributions to subsidiaries (85,000) --- (2,996) --------- -------- ------ Net cash used by investing activities (104,887) (5,488) (2,921) --------- -------- -------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt 115,000 --- --- Principal reductions in long-term debt (19,072) (4,450) (2,600) Cash dividends paid (12,770) (11,557) (9,937) Proceeds from stock options exercised 2,237 1,602 828 Shares acquired for retirement --- (3,986) (3,254) -------- ------- ------- Net cash provided (used) by financing activities 85,395 (18,391) (14,963) -------- ------- ------- Net increase (decrease) in cash 1 1 (2) Cash at beginning of year 4 3 5 -------- ------- ------- Cash at end of year $ 5 $ 4 $ 3 ======== ======== =======
Page 35 65 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS BOARD OF DIRECTORS CITIZENS BANKING CORPORATION We have audited the accompanying consolidated balance sheets of Citizens Banking Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citizens Banking Corporation and subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Ernst & Young LLP Detroit, Michigan January 18, 1996 Page 36 66 REPORT OF MANAGEMENT MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation of the consolidated financial statements and all other financial information appearing in this Annual Report. The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles. SYSTEM OF INTERNAL CONTROLS The Corporation maintains a system of internal controls designed to provide reasonable assurance that assets are safe-guarded and that the financial records are reliable for preparing Consolidated Financial Statements. The selection and training of qualified personnel and the establishment and communication of accounting and administrative policies and procedures are elements of this control system. The effectiveness of the internal control system is monitored by a program of internal audit and by independent certified public accountants ("independent auditors"). Management recognizes that the cost of a system of internal controls should not exceed the benefits derived and that there are inherent limitations to be considered in the potential effectiveness of any system. Management believes the Corporation's system provides the appropriate balance between costs of controls and the related benefits. AUDIT COMMITTEE OF THE BOARD The Audit Committee of the Board of Directors, comprised entirely of outside directors, recommends the independent auditors who are engaged upon approval by the Board of Directors. The committee meets regularly with the internal auditor and the independent auditors to review timing and scope of audits and review audit reports. The internal auditor and the independent auditors have free access to the Audit Committee. INDEPENDENT AUDITORS The Consolidated Financial Statements in this Annual Report have been audited by the Corporation's independent auditors, Ernst & Young LLP, for the purpose of determining that the Consolidated Financial Statements are free of material misstatement. Their audit considered the Corporation's internal control structure to the extent necessary to determine the scope of their auditing procedures. John W. Ennest Charles R. Weeks John W. Ennest Charles R. Weeks Vice Chairman, Chairman Chief Financial Officer and Treasurer and Chief Executive Officer Page 37 67
- ----------------------------------------------------------------------------------------------------------------------------------- Please mark your votes as indicated in /x/ this example 1. ELECTION OF DIRECTORS THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES LISTED. For all nominees Withhold Class I (three year term): Edward P. Abbott, Hugo E. Braun Jr., listed (except as Authority Jonathan E. Burroughs II, Lawrence O. Erickson, William J. Hank, and marked to the as to all nominees Robert J. Vitito. contrary) listed TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE, DRAW A LINE THROUGH THE / / / / NOMINEE'S NAME. Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as Attorney, Executor, Personal Representative, Administrator, Trustee or Guardian, please give full title as such. If signing on behalf of a corporation please sign in full corporate name by President or other authorized officer. If signing on behalf of a partnership, please sign in partnership name by authorized person. Dated: , 1996 ----------------------------- ----------------------------------------- Signature ----------------------------------------- Signature if held jointly
- ------------------------------------------------------------------------------- FOLD AND DETACH HERE REMINDER Dear Shareholders(s): Our records indicate that you have not delivered for exchange your Royal Bank Group, Inc. ("Royal") shares for Citizens Banking Corporation ("Citizens") shares following the merger of Royal into Citizens. Since you have not delivered your Royal shares for exchange, under our tabulator's system, the enclosed proxy card will reflect the number of shares of Royal owned by you prior to the merger. Be assured however that when tallied, the shares will be converted to reflect the full number of Citizens shares you were entitled to upon the effective date the merger of Royal into Citizens. We urge you to submit your certificate(s) as soon as possible so that the exchange may be made and your accrued dividends may be distributed. If you should have any questions, please feel free to contact us. Sincerely, James M. Polehna Assistant Vice President Shareholder Relations Manager - ------------------------------------------------------------------------------- PROXY CITIZENS BANKING CORPORATION FLINT, MICHIGAN PROXY BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS - APRIL 16, 1996 The undersigned shareholder of Citizens Banking Corporation (the "Corporation") hereby appoints George H. Kossaras and Patricia L. Learman, or either of them, my proxies or proxy, with full power of substitution to vote all shares of stock of the Corporation that the undersigned would be entitled to vote at the annual meeting of shareholders of the Corporation to be held in the Carriage Hall Room of the Radisson Riverfront Hotel Flint, One Riverfront Center West, Flint, Michigan, on Tuesday April 16, 1996, at 10:00 a.m. local time, and at any adjournments thereof, and thereat vote all shares of stock of the Corporation that the undersigned would be entitled to vote upon the matter of the election of directors, and in their discretion, upon such other matters as may properly come before the meeting. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED; IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR EACH NOMINEE NAMED ON THE REVERSE SIDE OF THIS PROXY. For participants in the Corporation's Amended and Restated Section 401(k) Plan ("Plan"), this card also provides voting instructions to the Trustee under the Plan for the undersigned's allowable portion, if any, of the total number of shares of Common Stock of the Corporation held by such Plan as indicated on the reverse side hereof. These voting instructions are solicited and will be carried out in accordance with the applicable provisions of the Plan. The undersigned acknowledges receipt of the Notice of Annual Meeting of Shareholders and the Proxy Statement dated March 14, 1996 and ratifies all that the proxies or either of them or their substitutes may lawfully do or cause to be done by virtue hereon and revokes all former proxies. - -------------------------------------------------------------------------------- FOLD AND DETACH HERE 68
- ----------------------------------------------------------------------------------------------------------------------------------- Please mark your votes as indicated in /x/ this example 1. ELECTION OF DIRECTORS THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES LISTED. For all nominees Withhold Class I (three year term): Edward P. Abbott, Hugo E. Braun Jr., listed (except as Authority Jonathan E. Burroughs II, Lawrence O. Erickson, William J. Hank, and marked to the as to all nominees Robert J. Vitito. contrary) listed TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE, DRAW A LINE THROUGH THE / / / / NOMINEE'S NAME. Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as Attorney, Executor, Personal Representative, Administrator, Trustee or Guardian, please give full title as such. If signing on behalf of a corporation please sign in full corporate name by President or other authorized officer. If signing on behalf of a partnership, please sign in partnership name by authorized person. Dated: , 1996 --------------------------- ----------------------------------------- Signature ----------------------------------------- Signature if held jointly
- -------------------------------------------------------------------------------- FOLD AND DETACH HERE Dear Shareholder(s): Enclosed you will find material relative to the Corporation's 1996 Annual Meeting of Shareholders. The Notice of the Annual Meeting and proxy statement describe the formal business to be transacted at the meeting, as summarized on the attached proxy card. Whether or not you expect to attend the Annual Meeting, please complete and return promptly the attached proxy card in the accompanying envelope, which requires no postage if mailed in the United States. Please remember that your vote is very important to us. We look forward to hearing from you. James M. Polehna Assistant Vice President Shareholder Relations Manager - ------------------------------------------------------------------------------- PROXY CITIZENS BANKING CORPORATION FLINT, MICHIGAN PROXY BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS - APRIL 16, 1996 The undersigned shareholder of Citizens Banking Corporation (the "Corporation") hereby appoints George H. Kossaras and Patricia L. Learman, or either of them, my proxies or proxy, with full power of substitution to vote all shares of stock of the Corporation that the undersigned would be entitled to vote at the annual meeting of shareholders of the Corporation to be held in the Carriage Hall Room of the Radisson Riverfront Hotel Flint, One Riverfront Center West, Flint, Michigan, on Tuesday April 16, 1996, at 10:00 a.m. local time, and at any adjournments thereof, and thereat vote all shares of stock of the Corporation that the undersigned would be entitled to vote upon the matter of the election of directors, and in their discretion, upon such other matters as may properly come before the meeting. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED; IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR EACH NOMINEE NAMED ON THE REVERSE SIDE OF THIS PROXY. For participants in the Corporation's Amended and Restated Section 401(k) Plan ("Plan"), this card also provides voting instructions to the Trustee under the Plan for the undersigned's allowable portion, if any, of the total number of shares of Common Stock of the Corporation held by such Plan as indicated on the reverse side hereof. These voting instructions are solicited and will be carried out in accordance with the applicable provisions of the Plan. The undersigned acknowledges receipt of the Notice of Annual Meeting of Shareholders and the Proxy Statement dated March 14, 1996 and ratifies all that the proxies or either of them or their substitutes may lawfully do or cause to be done by virtue hereon and revokes all former proxies. - -------------------------------------------------------------------------------- FOLD AND DETACH HERE -----END PRIVACY-ENHANCED MESSAGE-----